Prediction: Here's What the Fed Rate Cut Means for the Housing Market in 2025
Nobody has a crystal ball that can predict real estate trends. But read on for my take on the most likely path.
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As you may have heard, the Federal Reserve cut the federal funds rate at its September meeting. The 50-basis-point reduction in the benchmark rate is the first cut since early 2020 and is expected to be the first in a series of cuts.
According to the Fed's economic projections released along with the interest rate cut, the median expectation of Federal Reserve board members is for a total of 200 basis points (two percentage points) of rate cuts by the end of 2025.
We've already started to see mortgage rates come down, but it's too early to know if there are any significant effects on home prices, sales volume, or other aspects of the real estate market. However, here's an overview of what I think the Fed rate cuts will mean for housing in the United States.
The current state of the housing market
Before we discuss any predictions about the future of the housing market, it helps to get a sense of where things currently stand. So, here's what you should know:
- The average 30-year mortgage rate has fallen rapidly, both in anticipation of Fed rate cuts and in reaction to the 50-basis-point cut in September. The average is currently 6.15%, down from a peak of 7.9% in late 2023.
- Existing home inventories have rebounded from the generational lows we saw in 2023 but are about 41% lower than they were a decade ago, having steadily fallen for years.
- New home sales currently make up about one-third of home sales volume, up from about 10% in a typical real estate market.
- The average U.S. home value is $361,282, according to Zillow. This is 2.9% higher than a year ago.
What will Fed rate cuts mean for the housing market in 2025?
To be perfectly clear, the recent Fed rate cut all by itself doesn't mean too much for the housing market in 2025. Mortgage rates have fallen, but at about 6.2% for a 30-year mortgage loan, it's not likely to prompt homeowners with 3% and 4% mortgage rates to come off the sidelines yet.
However, the expected continued Fed rate cuts could certainly invigorate the housing and mortgage markets. Most recent expectations call for 30-year mortgage rates in the 5.5% to 6% ballpark in 2025, which could help boost inventories and make mortgage payments more affordable for would-be home buyers.
It's also worth noting that more homeowners could be tempted to tap into their home equity through HELOCs (home equity lines of credit), whose rates are usually directly dependent on the Fed's moves. So, my prediction is that we'll see a significant spike in existing home inventories and home sales, as well as HELOC and mortgage refinancing volume.
But I don't expect we'll see much of a change in home prices, in either direction. Simply put, there are two opposing forces working against each other: More homes for sale could usually be expected to put downward pressure on prices, but falling mortgage rates could improve affordability and cause buyers to come rushing into the market. I believe these two factors will effectively cancel each other out, and we'll see home prices that are flat or modestly higher by the end of 2025.
To be clear, these are only predictions based on the currently available information and my roughly two decades of experiences observing real estate market and interest rate trends. But it's entirely possible I could be completely wrong -- especially if the economy throws us a curveball along the way.
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