Mortgage rates are dropping, but homes aren't expected to get cheaper—here's why

Mortgage rates are falling, but that doesn't guarantee homes will be more affordable in 2025.

The average 30-year fixed mortgage rate dropped to 6.2% as of Thursday, down from a peak of 7.79% in May. For many buyers, that means saving hundreds on mortgage payments.

But those savings are bringing buyers back into the market. Existing home sales increased 1.3% in July, after five months of declines, per National Association of Realtors data. With more buyers competing for a limited number of homes, prices are likely to rise.

Why lower mortgage rates could lead to higher home prices

While lower mortgage rates help out buyers, the larger force at play in the housing market is supply. A longstanding lack of homes — at least 4 million, according to NAR's most recent estimate — means the supply of homes can't keep up with rising demand, pushing prices higher.

"In essence, affordability improves temporarily with lower rates, but the competition for scarce housing stock often offsets those savings, especially in markets with high desirability that are known to have limited supply like New York," says Maggie Kent, a real estate agent at CORE and sales at Eastlight Condominiums in New York.

Existing home sales were near historic lows for most of the summer, as rising mortgage rates both pushed buyers out of the market and discouraged homeowners from selling, since many are holding onto their lower-rate loans.

Roughly 86% of existing mortgages have rates of 6% or less, making it tough for homeowners to justify moving and taking on a new mortgage with a higher rate.

"If mortgage rates drop below 6%, it's likely to increase demand for homes, which could push prices higher," in the next year, says Kent. She says we could see a "modest" median home price increase of 3% or 4%.

Mortgage rates are expected to fall as home prices rise

Trade associations and financial firms predict mortgage rates will be in the high 5% range for 2025. While the rates are most closely aligned with 10-year Treasury yields, they're expected to fall following anticipated Fed rate cuts starting this month.

Modest home price increases are expected, too. Here is a sampling of recent forecasts:

• Goldman Sachs forecasts home prices growing by 4.4% in 2025.
• Fannie Mae predicts a 3.1% increase in 2025, based on a survey of 100 housing experts
• A Reuters poll of 30 property analysts forecasts a median home price increase of 5.4% in the 20 largest U.S. cities

Considering that homes currently cost a median of $412,300, price increases of 3% or more could add tens of thousands of dollars to the total cost, potentially offsetting the savings from a lower mortgage rate.

However, it's worth noting that housing shortages affect each real estate market differently. This could affect whether prices increase or decrease in the next year.

"The housing shortage is heavily dependent on location," says Alex Shekhtman, CEO and founder of LBC Mortgage. "For example, we won't see the same type of shortage in Texas as we do in Los Angeles. Each market has its own dynamics."

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