2025 Interest Rate Outlook
The Dot Plot shows Federal Reserve Officials prediction on the federal fund rate overtime.
The Feds Actions: 2024 Summary
2024 saw 3 rate cuts by the Fed, as they ease their fight against inflation. This ended with a total of 100 basis points or 1% less in the federal funds rate than in 2023. However, this reprieve also came with less support from the Fed in the bond market that mortgage rates come from. The Fed buys mortgage backed securities creating demand and competition from other investors which leads to lower mortgage rates for homeowners. The Fed effectively subsidizes the housing market and helps keep mortgage rates low by purchasing these mortgage backed securities. When the Federal Reserve talks about “shrinking its balance sheet” it means they are buying less of these long term investments. By selling off mortgage backed securities and buying fewer in 2024 than they did in 2023, the Federal Reserve is not as active in reducing mortgage rates as they once were.
2025 Expectations
Even after their cut in December of 2024, mortgage rates went up. This is largely due to the Feds update of their predictions for future cuts. The majority of the Feds officials only predict two interest rate cuts, compared to the previous meeting where most of officials predicted 4-6 cuts. The Federal Reserve is being cautious with cutting rates and will continue to monitor economic data. The sentiment after the December meeting indicated “higher for longer” with regard to rates.
Current Takeaways
If you are considering buying a home, don’t expect rates to be significantly lower anytime soon. Rates will likely fall slowly. This is not necessarily a bad thing for homebuyers because a rapid reduction of rates can cause home prices to soar. The housing market has been resilient indicating that there is some stability in home prices. Higher rates have not caused a “crash” or led to huge price reductions, despite the increase in payments. Slowly returning to lower interest rates will keep home prices reasonable for buyers in 2025 while opening the door to future refinances as rates continue to drop.
