2025 Mortgage Industry Outlook: Interest Rates, Housing Inventory, and Home Prices

2025 Mortgage Industry Outlook: Interest Rates, Housing Inventory, and Home Prices

The last few years have been difficult for potential homebuyers and those looking to refinance. Persistently high interest rates, elevated home prices, limited housing supply, and the ongoing pressure of inflation on budgets have made it challenging for many to achieve their dream of owning a home.

These challenges are expected to continue to some degree in 2025, but is there hope on the horizon? This article explores three key mortgage industry variables - interest rates, housing inventory, and home prices - and how they could impact your decision to buy or refinance a home.

1. Steady or Decreasing Interest Rates

Interest rates are one of the most critical factors in the mortgage industry because they directly impact the affordability of a home loan. Since the first Federal Reserve (the Fed) rate cuts in September 2024, mortgage interest rates have fluctuated, offering periodic relief to prospective homebuyers and those looking to refinance. While rates are still higher than pre-pandemic levels, they appear to have steadied, which is encouraging.  Whether or not the Federal Reserve will continue to cut interest rates throughout 2025 remains uncertain, but many experts expect at least one or two more cuts by year-end. Experts also agree consumers could see mortgage rates still hovering between 6%-7% for a standard 30-year fixed loan, depending on inflation trends.

It’s important to note that while the Fed’s rate cuts influence mortgage rates, they do not set rates. There is not a one-to-one correlation between the Fed’s percentage reduction and how much mortgage rates will drop. For example, if mortgage rates were 6.5% before a Fed rate cut of .5%, the new mortgage rates won’t automatically be 6% after the cut, but they may trend lower.

What This Means for You: If you’re considering purchasing a home or refinancing in 2025, you could see a more affordable mortgage rate environment compared to recent years. Even a small change in rates can greatly affect your monthly payments, so it’s important to stay informed about any changes so you can determine the right time for you to act.  Even if you aren’t ready to finance right now, it’s extremely beneficial to work with a Mortgage Loan Officer because they can notify you as soon as rates change in your favor.

2. Increase in Housing Inventory

The housing inventory crunch has been a significant issue for potential buyers the past few years. Since the COVID-19 pandemic, supply chain disruptions and labor shortages slowed new home construction, while demand surged. This led to a shortage of homes on the market, making it more competitive and driving up prices. There is good news for 2025 because new-home sales and single-family housing starts are expected to increase by 13.8% over 2024.

Additionally, the “mortgage rate lock-in effect” appears to be to easing, which could help increase housing inventory in 2025. This effect happens when existing homeowners have little motivation to sell their home and finance a new home at a higher rate than they currently pay. Existing home inventory has been relatively low in recent years partially due to this effect. Today, approximately 85% of U.S. homeowners with a mortgage have an interest rate below 6%. This is down from 90.6% at the beginning of 2024.

What This Means for You: A rise in both new and existing home inventory could offer relief if you've been frustrated by bidding wars and limited options while searching for a home in a stagnant market. With more homes available, you may find yourself in a stronger position to negotiate. However, competition is likely to remain intense in popular, high-demand areas.

3. Steadying Home Prices

Over the last few years, home prices have surged, particularly during the pandemic. With limited inventory and high demand, many buyers found themselves paying top dollar for homes. In 2025, the pace of price growth is expected to moderate.

While home prices are unlikely to drop significantly, the rapid appreciation seen in recent years is expected to slow down. Many experts believe that home prices will increase at a more sustainable pace, around 2% to 5% annually, depending on the region.

The slowdown in price growth will not be uniform. Markets that have experienced the most intense price surges—such as coastal cities and tech hubs—may see a more noticeable deceleration. On the other hand, “more affordable regions” may continue to experience higher growth rates as buyers seek out less expensive housing options.

As mentioned earlier, builders are expected to not only build more homes in 2025 but also more affordable homes. The number of new homes sold for less than $300,000 rose from 14% in September 2023 to 17% in September 2024. This trend is expected to continue in 2025, giving homebuyers more affordable options. 

What This Means for You: If you want to purchase a home this year, steadying prices may offer a better opportunity to enter the market without facing the intense price hikes. While prices are still expected to rise, the cooling market could give you more room to negotiate and perhaps find properties that are more suited for your budget.

While interest rates, inventory, and home values are unlikely to return to pre-pandemic levels any time soon, the industry appears to be pointing in the right direction.

Key Takeaways for 2025:

• The mortgage industry in 2025 is expected to see steady or declining interest rates, increased housing inventory, and steadying home prices.
• There could be more rate cuts in 2025, but that decision remains up to the Federal Reserve and is heavily influenced by inflation and other economic conditions.
• New and existing home inventory should improve slightly, offering more affordable choices and negotiating power for buyers.
• Home prices are expected to grow more slowly, offering a more predictable and less frenzied market.

If you have questions about lending options, start with an FNBO Mortgage Loan Officer and get prequalified before you begin your homebuying search.