2025 Mortgage Rates Forecast: The Case for 5% Rates

One thing you can count on in life is that forecasts are off in one way or another. So why not swing for the fences and make a bold prediction for 2025? Here’s mine: 5% mortgage rates in 2025.

Keep in mind that this is just my opinion. And by 5%, I’m thinking perhaps low 5s, but perhaps closer to 5.5%. Also, none of this represents my company’s official view. They have way smarter people working on this. Consider this pure entertainment.

Let’s take a look at why 2025 mortgage rates might turn out much better than anyone expects.

History Shows High Rates Don’t Last Long

Since 1971, mortgage rates have proven to be self-balancing. They never seem to stay high for more than about three or four years after a sharp increase.

I looked at periods in history where the 30-year mortgage rate increased by more than one percentage point (100 basis points) in 12 weeks — a fairly sharp rise.

While there are quite a few instances, I consolidated some of them while making sure significant periods weren’t missed.

*There is some gray area as to which periods to include and not include. I felt these were the most significant instances in history. Three periods added that did not quite meet criteria but were significant were the dotcom bubble era in April 1999-January 2001, the run-up to the housing meltdown 2005-2008, and Donald Trump’s first election win in November 2016.

The average duration of a meteoric rise was two years nine months.

These periods don’t tend to last long. Typically rates are at or near previous levels within about three years.

Note that the current mortgage rate elevator ride is two years eleven months old. By the end of 2025, the period will have been nearly four years.

That’s nearly as long as the longest high-rate period in history, about four years six months between 1987 and 1991. That’s no guarantee that rates will fall. Rates were unsustainably low for two years prior to the 2022 increase. The harder you pull a slingshot, the faster it snaps back.

However, there’s also a chance history could rhyme. Rates could follow the typical three-year cycle and come back down to earth in 2025. Not to pandemic levels, but somewhere closer to averages seen over the past 20 years.

The average 30-year fixed mortgage rate over the past two decades, including the recent period of high rates, is just 4.77%.

What Could Cause 5% Mortgage Rates?

Some skeptics won’t accept the idea of technical analysis – the practice of looking at past trends to determine future market movements.

They want the real reasons rates could fall. Well, OK then, let’s get into it.

Dropping Inflation

Mortgage rates are influenced in large part by inflation.

Knowing this, it’s easy to see why mortgage rates have been so high the past three years.

Inflation neared 7% annually in 2022, the highest seen in the U.S. in decades.

The Federal Reserve has worked to bring down inflation since the pandemic. As of this writing, the Consumer Price Index shows inflation at around 3.3%, similar to numbers seen since 2010. These are much more reasonable numbers than we saw from 2021 to 2023.

It’s also worth noting that mortgage rates follow inflation, but can do so in a delayed fashion. Inflation had been rising for almost a year before mortgage rates followed in January 2022.

This pattern could indicate a delayed response to falling inflation, too. It wasn’t until July 2024 that inflation hit the more historically normal high-2% range. If a year delayed, mortgage rates could follow in mid-2025.

Recession

Mortgage rates tend to fall rapidly after a significant, negative, and unexpected economic event. Rates fall more slowly – or not at all – with persistent inflation and a strong economy.

By all accounts, we should have had a recession in 2024. Yet the economy is stronger than ever and the stock market is way up thanks in part to developments in AI. Will AI in 2025 be more like dotcoms in 1998, when trends had room to run, or in 2001 when the bubble burst? While the AI movement still seems young, anything could happen.

While no one hopes for a recession, this is the clearest path to lower rates.

Most people would hope for a strong economy, since it’s better to have a job than a low mortgage rate. But there’s no such thing as a recession-proof economy. Low mortgage rates are always on the table.

Geopolitical Events

World events can influence U.S. mortgage rates. Investors tend to buy mortgage bonds in times of uncertainty, as these bonds are perceived as relatively safe assets. High demand for mortgage bonds drives down rates.

While humanity strives for peaceful resolution to conflict, we must recognize the unfortunate reality that global instability and heightened tensions could increase demand for mortgage bonds, and indirectly result in lower rates within the U.S. housing market.

What About President Trump?

Perhaps the biggest counter argument to 5% rates is that President Trump will take office this month.

While the President once claimed he’ll bring mortgage rates down to 2%, his policies don’t reflect that priority.

Stiff tariffs, immigration reform, and the promise of a robust economy can all drive up the cost of goods.

• Tariffs put a tax on cheaper foreign goods.

• Immigration reform can remove workers from the workforce, driving up the cost of labor. Companies must charge more to compensate. (Immigration accounted for 60% of workforce growth in 2022 says the National Association of Manufacturers)

• According to TaxFoundation.org, Trump’s plan to lower corporate taxes could promote “long-run economic growth.” When people have jobs and make more money, they spend more, driving up demand and the cost of goods and services.

“Higher prices” is another way of saying “inflation.”

Mortgage rates tend to rise during periods of elevated inflation. This is because the interest rate on mortgage bonds must be meaningfully higher than inflation for investors to make any money.

For example, someone might not place their money in a savings account at 1% interest if inflation were 5%. That’s effectively losing 4% per year. They will remove their money from that account and find another savings vehicle that pays more.

But it’s even worse for investors in mortgage bonds. They must account not only for inflation, but early payoffs and defaults – their mortgage bond interest rate must beat inflation. So if inflation rises – or investors perceive it may rise in the future – these mortgage bonds have to come with a sweet interest rate for them to take the risk.

So how does all this relate to President Trump? Again, his administration is expected to employ policies that spur the economy, and with it, prices of goods and services.

But there is a counter point to all this. Rates rose after Trump’s first election win. But where did they end up? Quite low. In the chart above, note that mortgage rates started dropping in 2019, long before COVID was in the picture. Yet, the above policies were at least being talked about, if not already in play.

There is a case to be made for at least somewhat lower rates under Trump.

5% Rates: The Window Will Close Quickly

If rates do hit 5%, be ready. Have a fully underwritten preapproval from a lender in hand.

Why? Home prices will rise so quickly that you’ll need to make an offer within weeks or even days of falling rates.

There’s unspeakable pent-up demand for homes. Millions of ready, qualified buyers have been priced out of the market since 2022. They’ve been waiting, just like you.

Those who are unprepared might see home prices rise $20,000, $40,000 or even $100,000 before they even realize what’s happening. Most markets are experiencing extremely low inventory levels, which will lead to higher prices if rates drop. Only the already-approved buyers will have the hope of landing a home at today’s relatively affordable prices.

If you’re a serious buyer looking at 2025, apply and get approved now just in case rates drop. Waiting until after a potential decline in rates will be a losing game.

And if rates remain elevated? At least you’re ready. You can make an offer if you see an affordable home come on the market. There’s nothing to lose by being prepared.