Happy New Year, although this year may not be so happy for homeowners and worse for potential homeowners. Both groups are getting hit with increasing costs they never assumed would come. More next week about the growing expense of owning a home.
On Dec. 18, the Federal Reserve enacted a quarter point reduction in interest rates. Sometimes financial markets and mortgage rates react favorably to rate reductions and sometimes they don’t. This time, both the stock market and the mortgage markets didn’t like it. The stock market took a dive, losing more than 1,100 points for the Dow and the mortgage rates for the following two weeks went up.
The reason for this is the Federal Reserve signaled earlier that inflation was under control and they anticipated further rate reductions going forward. Well, we all know that we probably won’t see 3% mortgage interest rates again, but buyers and investors were anticipating at least a little relief on rates. The Federal Reserve backed off their “inflation is under control” narrative and didn’t leave much hope for future rate adjustments.
Mortgage rates for a 30-year fixed rate mortgage went up to about 6.7% from around 6.4% or 6.5%. It doesn’t seem like a lot, but every increase results in lowering the amount of home purchasers can afford.
The projection for 2025 isn’t much better, either, in spite of the fact that in January 2023 some analysts thought rates would be around 4.5% by the end of 2024, obviously a major overstatement. Federal Reserve Chair Jerome Powell says: “Forecasts are highly uncertain, forecasting is very difficult.” This is where my head started to explode.
Nevertheless, the big brains of finance who admit to the difficulty in forecasting are still forecasting for the new year. So, here’s what some of them are saying.
Fannie Mae’s chief economist says, “Long-run interest rates have moved upward over the past couple of months following a string of continued strong economic data and disappointing inflation readings.” They are putting the average 30-year fixed rate at 6.5% in the beginning of 2025, declining to 6.1% in 2026.
The Mortgage Bankers Association (MBA) in its 2025 finance forecast indicates that mortgage rates will gradually slide from 6.6% at the beginning of 2025 to 6.3% through 2026.
The National Association of Home Builders is forecasting 6.12% in 2025 and 5.71% in 2026. The National Association of Realtors (NAR) is predicting 5.9% in 2025 and 6.1% in 2026. And, finally, realtor.com is saying only that in 2025 the range will be between 6.2% and 6.3%. It is interesting that the organizations involved in actually selling homes are more optimistic than the financial institutions.
Getting back to Fannie Mae, they are saying the 30-year fixed rate mortgage rate is now expected to stay elevated between 6% and 6.5% for the next two years. But since “forecasting is difficult,” who really knows?
My advice to potential homeowners who require a mortgage is act now, since you really won’t know what the rates will be going into 2025. If you find a home you like that you can afford, putting it off waiting for a better mortgage rate is a bad decision. You’ll never catch up with the market just waiting for a ½ point decline or even a full point decline. Live your life now, buy your home and get a crystal ball.
