Five mortgage trends to watch in 2025

2024 was another tough year for the mortgage industry. Will 2025 be better?

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There are signs it could be. Originators can expect a busier year with increased purchase and refinance volume, according to forecasts. Yet, higher-than-expected interest rates and a shortage of affordable homes remain a problem.

A second Trump term could also have an impact on housing finance. The incoming administration has promised substantial changes in Washington. So, in what could prove to be a fascinating year, here are five trends to watch in the mortgage industry.

High interest rates

Although the Federal Reserve slashed the overnight borrowing rate by a percentage point in 2024 and is signaling at least another half percentage point cut this year, long-term mortgage rates aren’t expected to drop much.

In December, the Mortgage Bankers Association (MBA) predicted the 30-year-fixed rate would fall only marginally, averaging 6.4% in 2025. Fannie Mae, Wells Fargo and the National Association of Home Builders among others have made similar predictions, citing among the causes the possibility of inflation and economic uncertainty. Gone, it would seem, are the days of sub-4% mortgages.

“We may well be experiencing the pains of adjusting to a new normal, with persistent interest rates of 6% or higher,” said Steven Bourassa, director of the Washington Center for Real Estate Research at the University of Washington, this past week. Bourassa noted that rates were higher at the end of 2024 (6.85%) than at the end of 2023 (6.61%).

Higher interest rates will continue a “lock-in effect” where people have been reluctant to sell a home and buy another, Fannie Mae Chief Economist Mark Palim told Yahoo Finance in December.

“People don’t want to move and give up that 3% mortgage rate,” Palim said. He noted that the annualized rate of existing home sales declined through 2024. “You are seeing the higher rates relative to what they were a few years ago really start to affect demand,” he said.

Refinancing surge

Refinancing surged at times last year during weeks when interest rates fell even modestly. Increases in home equity are also driving refinancing.

MBA is projecting that refinancing will account for a third of all mortgage volume in 2025, jumping nearly 37% by volume to $672 billion. Fannie Mae and others have predicted a similar surge. Meanwhile, purchase volume is also expected to rise to $1.4 trillion, up 8% compared to last year, according to MBA.

Housing affordability

A lack of affordable homes in many cities continues to be a problem, however. Last year, Moody’s Analytics’ Chief Economist Mark Zandi calculated the nation needs 2.9 million more affordable homes, roughly equivalent to two years of building. 

But single-family housing starts were moving in the wrong direction at the end of last year, running behind the 2023 annualized pace in November and October, according to the U.S. Census Bureau. 

Seasonally adjusted single-family starts in November declined to 972,000 single family starts from 999,000 in November 2023. The annualized pace also ran below a million starts in every month starting in March.

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Fannie Mae predicted that total housing starts, including single-family and multifamily, will be 1.35 million in 2025, down nearly 5% annually from last year.

That said, homebuyers should have more options this year.

Buyers can expect “a friendly, less competitive housing market” in 2025, according to Realtor.com. The “months supply,” or the estimated time it would take to sell the current inventory of homes for sale, has been increasing.

Realtor.com is predicting the nation’s supply will increase to 4.1 months in 2025 from an average of around 3.7 months last year. Under 4 months is considered a seller’s market whereas a supply of 4-6 months is balanced.

“We don’t expect to see supply above the 6-months range that would signal a buyer’s market, but 2025 is expected to be the most buyer-friendly market since 2016, when supply averaged 4.4 months across the year,” Realtor.com wrote in its 2025 housing forecast.

Also, buyers can take comfort in that home prices have been cooling off. CoreLogic, for example, predicts that home prices on a nationwide basis will increase just 2.4% in the 12 months through October. 

“A second Trump term means that government-sponsored enterprise (GSE) reform may be on the agenda once again, including the possibility of privatizing Fannie Mae and Freddie Mac. However, releasing these two crucial players in the housing market after a 17-year conservatorship won’t be easy to accomplish.”

Regulatory change

It is not clear how far the new administration will go in reversing Obama- and Biden-era regulations. But it is a safe bet that changes are coming to the Consumer Financial Protection Bureau (CFPB) and the Federal Housing Finance Agency (FHFA).

Donald Trump is expected to replace Biden appointees CFPB Director Rohit Chopra and FHFA Director Sandra Thompson, who both serve at the pleasure of the president.

The new directors “will likely take these agencies in a new direction,” according to the law firm Brownstein Hyatt Farber Schreck, which is also a leading lobbying firm.

Under new leadership, the agencies could stop or change pending rules and initiatives, including the CFPB’s examination of mortgage closing costs and “junk fees” and pending FHFA rules relating to fair lending and equitable housing. The law firm maintains the Republican-controlled Congress could also halt final CFPB and FHFA rules via the Congressional Review Act, as well as cut funds for rulemaking purposes.

GSE reform

A second Trump term means that government-sponsored enterprise (GSE) reform may be on the agenda once again, including the possibility of privatizing Fannie Mae and Freddie Mac. However, releasing these two crucial players in the housing market after a 17-year conservatorship won’t be easy to accomplish.

Fannie Mae and Freddie Mac have been extensions of the government since September 2008. In the second half of Trump’s first term, some progress was made in reform. The GSEs were allowed to retain earnings and build capital, and a rule was enacted spelling out how much capital they needed to retain post-conservatorship.

During the Biden administration, however, nearly all Fannie Mae and Freddie Mac reform efforts stopped, and several hurdles remain before they can be released, according to the NYU Furman Center, which examined the likelihood of reform last summer.

The government may have to adjust the capital rule to lower the requirements on Fannie Mae and Freddie Mac so they can be viable businesses. The GSEs may be required to pay a “commitment fee” in compensation for the taxpayer-supported government guarantee of the mortgage-backed securities. That fee is yet-to-be-determined.

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Also, the extent of the government’s control over the GSEs once they exit conservatorship needs to be defined, according to Furman. The government also must approve a process for raising capital and equity for the companies.

These steps may require rulemaking and lengthy public comment periods. They may also run up against special interest groups and politics, Furman concluded. All these factors make reforming Fannie Mae and Freddie Mac under Trump possible but not inevitable.