Average 30-Year Fixed Mortgage Rate Expected to Fall to 4.00% by 2025, Predicts Morningstar
The housing market’s current affordability is comparable to the peak of the housing bubble in 2006 due to a combination of factors including mortgage rates, home prices, and income levels. Mortgage rates spiked from 3% to 7% following the Pandemic Housing Boom, resulting in a national increase in house prices of over 40%.
To alleviate housing affordability concerns, three factors can contribute: falling mortgage rates, falling home prices, and rising incomes. Among these factors, mortgage rates have the greatest short-term impact, especially during financial market volatility.
According to a housing report by Morningstar, mortgage rates are expected to serve as the primary lever for improving housing affordability. Currently, the average 30-year fixed mortgage rate tracked by Mortgage News Daily stands at 7.14%. Morningstar predicts a downward trend in the second half of the year, with an average of 6.25% for 2023. The forecast model then projects mortgage rates to average 5.00% in 2024 and 4.00% in 2025.
Morningstar economists explained that the Federal Reserve has implemented a significant increase in interest rates to combat high inflation. However, they anticipate the Fed will aggressively cut the federal-funds rate throughout the coming years, driving it from the current 5% to below 2% by 2025. The economists believe that once inflation is under control, the priority will shift to stimulating economic growth, necessitating even lower interest rates.
Looking ahead, Morningstar anticipates a long-term trend of low mortgage rates. They attribute this prediction to factors such as an aging population and slowed productivity growth, which will exert downward pressure on long-term rates.
The economists at Morningstar also expect rising incomes and falling home prices to contribute to housing affordability. They project a mild correction in prices with a 6% decline for new homes and a 4% decline for existing homes between 2022 and 2024. The inventory of existing homes for sale, remaining below pre-pandemic levels, is expected to prevent a steeper decline in prices.
It is worth noting that Morningstar’s mortgage rate forecast is relatively conservative compared to other forecasters. The Mortgage Bankers Association and Fannie Mae project the average 30-year fixed mortgage rate to end 2023 at 4.9% and 5.6%, respectively. Moody’s Analytics expects a gradual decline to 6% by late 2024 and 5.5% by the end of 2025.
Regarding home prices, Morningstar has a more bearish outlook. Companies like Zillow and CoreLogic predict a rise of 5.0% and 4.6%, respectively, over the next 12 months. On the other hand, Moody’s Analytics expects a peak-to-trough decline of approximately 8% for national house prices.
Given the uncertainties in the economy, it is essential to approach mortgage rate and home price forecasts with caution. The volatility makes it challenging to accurately predict these factors.
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