In the past several years, higher mortgage rates and fewer homes for sale have been major roadblocks for homebuyers. That could change this year, as many predict the Federal Reserve will continue to reduce its interest rates, much like the 25 basis point cuts during the Fed’s meetings in November and December. Although the pace of rate cuts is likely to slow, mortgage rates should begin to react and follow the same trajectory. 

That’s not to say the housing market will suddenly flood with new homes for sale, nor will it likely become a buyer’s market. Here’s what you could expect in several months. 

Mortgage Rates

The Fed’s recent 100 basis point reduction in the federal discount rate since September could mean that mortgage rates could go down even further in 2025. However, the fed’s next meeting at the end of January is unlikely to see another reduction given December’s strong jobs report – as there is currently a 97% chance that rates will remain in place as implied by the 30-day fed funds future prices.

In 2024, rates fluctuated a fair bit, with 30-year fixed mortgage rates averaging from 6.08% to 7.22%. With many experts anticipating that the Fed will reduce rates four more times in 2025, the likelihood of mortgage rates trending toward the low end of the average mentioned is potentially possible. However, the fed recently signaled that there could be fewer rate cuts this year than originally anticipated and that future changes to the fed funds rate will be determined by ongoing economic indicators. 

Housing Supply

Of course, Fed rate reductions don’t directly impact mortgage rates, as other factors like employment levels, inflation, and 10-year treasury yields are involved in rate-setting decisions. Nor are lower rates an indicator that the housing market will more likely favor homebuyers. There needs to be sufficient new and existing homes for sale and at prices that buyers can afford.

Because of rising home prices and higher mortgage rates in the past few years, many existing homeowners are holding onto their current homes. According to research from the Consumer Financial Protection Bureau (CFPB), around 60% of homeowners with mortgages have rates below 4%. As such, many feel like they’re locked in and unlikely to sell their property any time soon. 

The number of new homes being built also impacts the number of homes for sale. With higher costs for building materials and housing restrictions that could delay permits, the housing supply could remain tight. Another potential related issue in 2025 is the threat of mass deportation of undocumented workers, which could impact skilled labor for new home construction, further tightening the housing supply.

With higher housing prices, affordability remains a challenge for many buyers. Until mortgage rates begin to drop sustainably, it will be difficult to predict whether buyers can afford to jump into the market in large numbers.

The Bottom Line

It’s virtually impossible to gauge the near-term future of the housing market, as it depends on several factors, including demand in certain areas, mortgage rates, and overall housing supply. It could be prudent to wait and see what happens with mortgage rates and home prices. If that’s the route you take the best step you can take now is to ready your finances for what is likely your largest life purchase – which involves knowing your credit score, how much you can qualify to borrow, and saving for a down payment.