Prospective homeowners have something to look forward to in the coming months. The average mortgage rate across the United States has started to decline in recent weeks, with experts suggesting this trend will continue well into the remainder of the year and much of 2025.
Mortgage rates have been at historically high levels for much of the last couple of years. In July 2024, the average 15-year mortgage was 5.99%, while the average 30-year mortgage was 6.73%, according to Freddie Mac’s recent research. Mortgage rates have now reached their lowest levels since February 2024 and have come down from their former peak in November 2023.
With mortgages still above the subpar levels witnessed between 2020 and 2021, many expect conditions to improve in the coming months as the U.S. Federal Reserve is expected to cut interest rates as early as September.
As conditions begin to change, and with many would-be homeowners now looking to enter the market after enduring a tumultuous period in the real-estate sector, is now the right time to buy property, or should you wait until rates have come down further next year?
How Mortgage Rates Change Over Time
Since last year, mortgage rates have steadily decreased, recently reaching a new low point. In late last year, both short—term and long-term mortgage rates peaked, with both reaching above 7% and even climbing above 8%.
Mortgage rates are often influenced by several factors aside from interest rates. These additional influences may include:
Inflation: Mortgage rates tend to rise with inflation as the cost of everyday items continues to climb, devaluing the dollar’s purchasing power.
Cost of borrowing: Interest rates set by the Federal Reserve will influence the cost of taking out a bank loan, making it more expensive to take on debt.
Treasury bond yields: Banks and other mortgage lenders will closely monitor the performance of Treasury bond rates to determine mortgage rate levels. When bond rates decline, mortgage rates increase, and vice versa.
Individual financial risk: Additionally, mortgage rates may be determined using individual financial risks, including debt-to-income ratio, downpayment size, credit score, and personal assets.
Mortgage rates fluctuate daily and weekly, and additional factors such as economic conditions and personal finances influence the overall mortgage rate level a person is offered by a mortgage lender.
Mortgage Rate Outlook For 2024 And 2025
There is strong support for the fact that mortgage rates will likely decrease in the coming months, with further possible declines into 2025.
The change in direction follows nearly two years of ongoing interest rate hikes. In 2020, the Federal Reserve cut interest rates to 0% to help stimulate economic activity during the pandemic-induced lockdowns.
The zero percent interest rates had kept mortgage rates at historically low levels for nearly two years before the Federal Reserve started raising interest rates to curb rising inflation and an overheating economy.
Between March 2022 and July 2023, the U.S. central bank raised interest rates 11 times, increasing rates from 0% to a range of 5.25% to 5.50%. This is currently where rates are sitting, however, in recent weeks, there have been reports that the Federal Reserve is expecting to begin cutting interest rates as economists share the fear over a potential recession.
Although mortgage rates aren’t directly tied to interest rates, both work interchangeably and when interest rates rise or fall, mortgage rates tend to change as well.
The announcement that interest rates may decrease in the coming months has brought positive news to the mortgage industry and would-be homeowners. Many experts predict mortgage rates will decline below 6.5% following the upcoming interest rate cut.
Some estimate that the average 30-year mortgage will likely drop below 6.5% to 6.7% in the last quarter of 2024. The average 15-year mortgage will maintain a level of 6% or lower. Heading into 2025, as more interest rate cuts are expected, experts predict that the average 15-year and 30-year mortgage could be between 6% and 6.3%.
As conditions improve and interest rates are pulled back, mortgage rates will likely decrease, providing much-needed support for the housing market.
Should You Buy Now Or Wait?
Realistically, the right time to buy property would be once mortgage rates have fallen well below current levels; however, this could take several more years. Additionally, there are other important considerations to take into account should you be waiting for a lower mortgage rate:
Property Price Appreciation
Average home prices are expected to rise in the coming years, with many experts estimating that home prices will rise 6.1% year over year by the end of 2024. The National Association of Realtors estimates that existing home prices will increase by 3.8% this year.
Housing prices will continue to rise as more buyers enter the market, fueled by lower mortgage and interest rates. Lower inventory levels may also push up prices even further, while modern additions to homes, such as solar energy and smart home features, drive up the average purchase price.
In fact, over 50% of renewable energy sources were added in 2023, with residential solar energy emerging as one of the leading sources for single-family homes. A VPN provider researched this topic, revealing that heightened concerns about data privacy influence homeowners’ decisions to adopt solar energy, leveraging its decentralized nature to enhance environmental and data security.
Growing Competition
As already mentioned, with the possibility of mortgage rates falling further this year and in 2025, competition in the housing market will steadily increase, leading to lower levels of available inventory and pushing up asking prices.
One of the biggest obstacles for current would-be buyers is affordability, and many have spent the last several years saving up for a down payment or have waited to enter the market once conditions have improved.
Supply and Demand
The U.S. has been grappling with a housing shortage since before the pandemic. In July, housing inventory improved slightly, with over 884,273 active listings on the market, according to the Reserve Bank of St. Louis. In January 2024, inventory levels stood at 665,659, an overall improvement from the recorded 376,970 available listings in January 2022.
Generally speaking, property prices are typically influenced by availability. As more listings become available on the market, the higher the chance of prices falling, seeing as there is less direct competition in the market. However, property prices can still rise due to higher inventory levels and can fluctuate due to wider economic factors such as inflation and interest rates.
How To Prepare Yourself
Before you shop around your local neighborhood for that dream property, take some time to get your ducks in a row.
Improve your finances
It’ll likely be another several months before mortgage rates are even lower than they currently are. During this time, focus on preparing your finances, such as raising more capital for a downpayment or looking for ways to improve your credit score.
You can talk to your bank about opening a credit account to increase your credit score or perhaps seek more suitable ways to increase your credit score without taking on too much debt.
Payoff high-interest debt
Another way to prepare is by paying off high-interest debt. Some loans you might’ve taken out over the last few years, but are still paying off due to the high level of interest rates. Now is your chance to begin paying off these accounts, and put that additional money towards your down payment.
Research affordable mortgages
Make sure to look around for an affordable mortgage. As we mentioned, mortgage rates vary across the board, and each lender offers a different rate. Moreover, mortgage rates tend to differ from state to state, although the difference isn’t often too noticeable.
You can look at mortgage lenders that offer favorable rates to first-time home buyers or talk to your bank about the possibility of offering a more favorable mortgage rate suited to your financial situation.
Don’t feel rushed
Take your time, and don’t feel pressured into buying something when you are not ready yet. Buying property is the largest big-ticket purchase any person will make, and you must take the time to consider your options beforehand.
You might feel that increased competition will price you out of the market. While property prices might rise over the coming years as more buyers enter the market, it will be another several months before mortgage rates fall even further. Take your time, and make an intelligent decision.
Looking Forward
While it’s been a tumultuous period for many would-be home buyers, things are finally improving and will likely improve as we enter into 2025. While there is still a lot of uncertainty ahead, and with many experts predicting that the average home price will continue to rise over the coming years, many buyers will be glad to know that mortgage rates have started to fall and will likely continue this trajectory in the coming months and years.
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