Mortgage rates will average 6.5% in 2025, but end the year at about 6.3%, as the Federal Reserve’s rate cuts begin to take effect.
That is one of the main takeaways from the 2025 housing market forecast from Veterans United Home Loans, the largest lender of Veterans Administration loans in the country. The report forecasts that the 2025 housing market outlook will offer a path to recovery, but affordability and inventory constraints will remain. The gross domestic product will grow at a rate between 2% and 3% and inflation will remain sticky, ticking up to around 3% or even a touch higher.
Veterans United expects that economic issues, including 10-year Treasurys, will put upward pressure on mortgage rates, but 30-year fixed-rate mortgages will decrease, and refinancing will pick up. The lender expects the Fed to cut rates by another 75 basis points, ending the year in the range of 3.50% to 3.75% for the federal funds rate.
“These rate cuts will help ease borrowing costs, but their impact on long-term mortgage rates will be tempered by broader fiscal and global economic factors,” wrote Joe Ellison, vice president of capital markets at Veterans United. “Rising Treasury issuance requirements and adjustments in fiscal policy will continue to influence the interest rate environment, creating a complex backdrop for the housing market.”
Ellison writes that affordability will remain a critical challenge as home prices are projected to grow by 3.2%. Buyers will continue to force sellers to make concessions and to take advantage of creative financing options to overcome high housing costs.
The median home price is forecast to grow 3.2% next year to $424,977 and for existing home sales to end the year between 4.2 million and 4.5 million units. On a negative note, the forecast expects inflation to rise to between 3% and 3.5%, creating a “challenging environment for both policymakers and consumers.”
Refinancing is expected to account for between 15% and 20% of the mortgage market. As the chances of a recession subside, the lending environment will improve. Homeowners will seek to tap into home equity and will dominate this segment, “with cash-out refinances and home equity product leading the way.”
