What to Expect in 2025?

It appears that home buyers are indeed adjusting to the current reality of higher mortgage rates. While the dream of sub-4% rates seems to be a distant memory, the housing market is showing signs of resilience as buyers become more comfortable with rates in the mid-to-upper 6% range. This doesn’t mean it’s all sunshine and rainbows, but it does indicate a shift in mindset and a willingness to proceed with home purchases despite the less favorable borrowing environment.

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I’ve been keeping a close watch on the housing market, and honestly, the past few years have been a wild ride. We went from record-low rates that made everyone jump into the market to a sudden rate hike that put a damper on things. But what I’m seeing now is more like a careful acceptance, and less of the panic that we saw just a year ago. It seems like buyers are finally saying, “Okay, this is the new normal. Let’s make it work.”

Home Sales Jump as Buyers Adjust to High Mortgage Rates

Key Takeaways

• Home buyers are getting used to higher mortgage rates, with sales increasing despite rates in the mid-to-upper 6% range.
• The Fed’s rate cuts aren’t directly impacting mortgage rates. Mortgage rates follow Treasury yields.
• Existing home sales are up 6% year over year as buyers adapt.
• The average mortgage rate for 2025 is predicted to be around 6%, depending on economic conditions.
• Buyers are driven by pent-up demand, increased inventory and a more realistic outlook.
• There may be small fluctuations, but the home-buying market is stabilizing overall.

The Numbers Don’t Lie: Sales Are Up

Let’s get right into the nitty-gritty. Despite mortgage rates hovering around 6.72% for a 30-year fixed mortgage (as per Freddie Mac), existing-home sales actually saw a 6% increase year over year in November, according to the National Association of REALTORS® (NAR). That’s a significant jump. This is contrary to what many would have predicted when rates started spiking, but the fact that they went up amidst higher interest rate indicates that buyers are adapting to this new reality.

Here’s what NAR’s chief economist, Lawrence Yun, had to say about this: He thinks that consumers are no longer expecting to see those ultra-low rates that we saw during the COVID pandemic. They have come to terms that those rates were an anomaly and not the norm. He also thinks that with mortgage rates mostly stable, there are more homes available for sale, and with job creation also on the rise; all of this is creating a perfect recipe for higher home sales. It’s a strong statement and one that I think is spot on.

Slowly Digesting the New Normal

Sam Khater, the chief economist at Freddie Mac, also has an interesting point of view. He mentioned that rates have been in the 6% to 7% range for the past year. He also thinks that buyers are taking it all in and slowly accepting the higher rates. They are gradually willing to move forward with buying a home. This is not to say people are jumping with joy. I think this is a case of making the best out of a not-so-good situation.

And I can see that. After all, the average mortgage rate over the past 50 years has been around 7.7%, according to Yun. That puts the current rates into perspective, even if it is not ideal. I remember a time when my parents got their first mortgage with rates higher than that! I think, subconsciously, buyers understand that and that makes the current rates slightly more palatable.

What About the Fed Rate Cuts?

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Now, you might be wondering about the Federal Reserve’s recent rate cuts. They’ve lowered their short-term benchmark interest rate by 25 basis points three times in a row since September. This is a big step, and usually, this would mean mortgage rates would come down too. However, mortgage rates haven’t reacted the way everyone expected.

Yun explained that the Fed’s interest rate isn’t directly linked to mortgage rates. Mortgage rates typically follow Treasury yields, which are a different beast altogether. So while the Fed is trying to ease things a bit, it doesn’t mean we’ll instantly see mortgage rates plummet.

Mortgage Rates This Week: Not Much Movement

Let’s look at the recent numbers to understand where we stand. Here’s what Freddie Mac reported for the week ending December 19:

• 30-year fixed-rate mortgages: Averaged 6.72%, up from 6.60% the previous week. Last year at this time, it was 6.67%.
• 15-year fixed-rate mortgages: Averaged 5.92%, up from 5.84% the previous week. Last year at this time, it was 5.95%.

As you can see, there’s been slight fluctuation. While it is not good news, it seems like rates are staying consistent and not jumping significantly which is a relief to everyone.

Why Are Buyers Adapting?

So, why are buyers adapting to these higher rates? It’s not just about accepting a new reality, I think there are a few different factors in play here:

• Pent-up Demand: For a while there, with all the uncertainty around the interest rate, many buyers took a backseat in the market. But they can’t hold out forever. People get married, have children, and need a bigger house etc. They eventually realize that they can’t delay their needs for too long and they need to proceed regardless of the interest rates.
• More Inventory: Increased inventory is another factor. Buyers have more options. When there are more houses for sale, the competition is not as intense and buyers are not under as much pressure. This allows them to take their time and negotiate better.
• Job Security: Employment has remained relatively strong. This gives people the confidence to make such big-ticket purchases. People are more likely to commit to buying a home if they are not worried about losing their job.
• Adjusted Expectations: As mentioned earlier, the pandemic-era low rates were an outlier. I believe, over time, people are starting to realize that what they see now is a more realistic, if not ideal, norm.
• The “When” Factor: A lot of people are coming to realize that it might not be worth it to wait for interest rates to drop. Everyone is hoping to get lower rates, but it is a question of when, not if, they will drop. People might decide to not wait forever and just get on with their lives now.

The Road Ahead: What to Expect in 2025

Looking ahead, NAR predicts that mortgage rates will average 6% for 2025. But Yun also points out that this depends heavily on various economic factors like inflation and the federal deficit. He says that the trajectory of rates will depend on them. So it’s a bit of a wait and see situation.

I think, as buyers, we should take a balanced approach, and be prepared for minor fluctuations. This could include exploring different mortgage products, being diligent about savings, and working with real estate professionals to get a competitive edge.

My Take on It All

The housing market is always complex and dynamic. The last couple of years have been exceptionally so. As someone who closely follows this market, I believe that the current stabilization is something we should appreciate. It shows a healthy resilience from the buyers. It doesn’t mean that the affordability issue has been solved or that everything will become very smooth. But it’s not as chaotic as it was earlier.

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I think what we are observing is the housing market slowly finding its footing in this new environment. While the ultra-low rates of the past are gone, the market is showing that it can adapt and move forward. Buyers are adjusting their expectations and making decisions based on their needs and current financial situations.

It might take some time for things to completely settle, and there might be a few bumps in the road, but as a whole, the home-buying market is looking more realistic and resilient than it did a few months back.