Mortgage rates may not make as big of a plunge as potential homebuyers would like in 2025, but there will be a pickup in refinancing as rates fall close to 6%, according to analysts for Fitch Ratings.
During a wide-ranging webinar on predictions for the housing market in 2025, Senior Director Eric Orenstein said that in the past two years, there have been about $3 trillion in home originations. Many of those mortgages have interest rates around 7%, and even as high as 8%. As rates begin to fall, homeowners with those mortgages will move quickly to refinance.
“We don’t know if it’s going to happen at the beginning of the year, in the middle, or the exact timing, but as mortgage rates once again approach 6%, there should be a pickup in refinancing volume which will have a meaningful impact on the mortgage originator financial performance,” Orenstein said.
This reaction was seen earlier this summer, according to Orenstein, when interest rates dropped to nearly 6%, causing a notable spike in refinancing.
However, the analysts made clear that the housing industry’s lock-in effect is having a major impact, with home sellers remaining on the sidelines because they have low mortgage rates on their current homes.
Olu Sonola, Fitch’s head of U.S. economic research, said that about 60% of U.S. homeowners have mortgages rates below 4% and 80% have rates below 5%. He believes rates would have to fall a considerable amount to make a difference with the majority of homeowners and spur real growth in the housing industry.
“The lock-in effect is not only constraining inventory, but also broad market activity,” Sonola said.
The analysts also predict that home prices will grow by about 4% as housing inventory remains constrained. Interest rates will decrease but will remain elevated. They mentioned Fannie Mae’s forecast that originations will growth 18% next year to $1.9 trillion.
Sonola said that the labor market and wage growth will cool next year, but he expected consumer spending to remain strong. “The theme is that the U.S. economy is doing really, really well right now,” Sonola said. “We have revised up our expectations for gross domestic product to 2.1% from our earlier estimate of 1.6%.”
The positive outlook extended to some of the major non-bank mortgage companies, which have improved their financial positions in the past year. Orenstein mentioned that Fitch had upgraded Rocket Mortgage, PennyMac Financial Services and United Wholesale Mortgage.
Fitch expects consumer spending to grow by 2.5% in 2025 and the inflation rate will tick up slightly to around 2.8%. Sonola pointed out that home equity lines of credit (HELOCs) have reached about $400 billion — jumping about $100 billion in little more than a year — to become the fastest-growing consumer liability, exceeding credit cards.
“Depending on what the banks do, that trend is probably going to continue, given the equity in homes,” Sonola said.
The elephant in the room remains government policy uncertainty as the Trump administration takes over the White House. There are many unknowns when it comes to the Trump administration’s policies, according to Sonola, such as what level of tariffs will be imposed and against which countries. But he expects that tariffs will not be as strong an economic impact as some have predicted.
