Well, 2024 sure didn’t turn out as planned, did it? The 10-year Treasury yield finished the year at 4.57%, and 30-year fixed-rate mortgages ended north of 7%—well above the high end of my predictions, and honestly, above what most economists and analysts expected.
So, how did we get here, and more importantly, what can we expect for 2025? Let’s break it down.
What Happened in 2024?
While many expected a significant drop in mortgage and interest rates, the economy remained more resilient than anticipated throughout the year. GDP growth held steady, consumer spending remained strong, and inflation declined—but not enough to hit the Fed’s 2% target. Even with some pockets of weakness, the labor market proved to be one of the strongest pillars of economic stability.
Interest Rates – The Fed’s Playbook
We started 2024 with the 10-year Treasury at 3.86%, and expectations were high that the Fed would begin cutting rates early. However, inflation and a strong job market delayed those plans, and the first rate cut didn’t come until September, when the Fed dropped rates by 0.5% (50 basis points). This was followed by two smaller cuts of 0.25% each in November and December, bringing the target Fed Funds rate down to 4.25-4.5%.
Despite these cuts, the Fed made it clear in its December 2024 meeting that we shouldn’t expect aggressive easing anytime soon. Citing persistent inflation pressures, a stable unemployment rate, and solid labor market conditions, they signaled that only one or two additional cuts might happen in 2025 unless economic conditions shift drastically. That’s why the 10-year Treasury yield rebounded back over 4%, ending the year at 4.57% instead of continuing downward.
While many focus on what the Fed Funds rate is doing, mortgage rates don’t directly follow the Fed’s moves. Instead, they track the 10-year Treasury yield, which tends to move ahead of the Fed. This is why we saw a fluctuation throughout 2024—starting at 6.72%, peaking at 7.52% in April, dropping to a low of 6.11% in September, and bouncing back above 7% by year-end.
One positive note from 2024 was the narrowing of the spread between the 10-year Treasury and 30-year fixed mortgage rates. At the beginning of the year, this spread was 2.85%, but by December, it had declined slightly to 2.5%. While this is an improvement, historically, the spread has averaged 1.7%, which means we still have room for mortgage rates to come down further—but that will depend on multiple factors.
Mortgage Rates – A Volatile Year
Mortgage rates followed the swings in the 10-year Treasury, creating a rollercoaster ride throughout 2024. The year began with rates at 6.72%, climbed to 7.52% in April, then dropped to a yearly low of 6.11% in September before climbing back above 7% by the end of the year.
The biggest factor influencing rates was the overall economic strength and inflation trends. As the labor market remained resilient, wage growth stayed strong, and consumer spending didn’t slow down as much as anticipated, mortgage rates reflected that ongoing economic momentum. Even as the Fed began cutting rates, mortgage rates didn’t follow in lockstep, since the Treasury market had already priced in expectations of future moves.
While the narrowing spread between Treasuries and mortgage rates provided some relief, the lending environment remained tighter than pre-pandemic years, keeping mortgage rates elevated.
Housing Market Performance – Existing & New Home Sales
Existing Home Sales Hit a 30-Year Low
While demand for housing remains high, affordability challenges, high mortgage rates, and low inventory pushed existing home sales to their lowest level since 1995, totaling just 4.06 million. This was well below the 10-year average of 5.2 million. However, home prices continued to rise, with the median existing home price hitting $404,400 in December, a 6% increase year-over-year.
Inventory remained tight, with only 1.15 million homes available, representing 3.3 months of supply—still below the healthy range of 4 to 6 months.
New Home Sales Show Modest Growth
Unlike the resale market, new home sales saw a slight increase, rising 2.5% year-over-year to 683,000 units. This growth was largely driven by homebuilders offering incentives and rate buydowns to make new construction more attractive. The median price for new homes dipped slightly to $420,100, down 1.98% from the previous year. Supply for new homes also increased to 8.5 months, which is a slight improvement but still reflective of a supply-constrained market.
2025 Outlook – "Higher for Longer"
Heading into 2025, the phrase “Higher for Longer” is the dominant theme. Many economists and analysts who previously predicted a significant rate drop and a recession have walked back their forecasts. The broad consensus is that mortgage rates will trend between 6% and 7% for most of the year, with some experts predicting rates could settle around 6.3% by the end of 2025.
Will Home Prices Drop?
The big question is: If rates stay elevated, will home prices fall? The answer—probably not on a national level. While some regional markets (Florida, Texas, and parts of California) saw price declines in 2024, national prices are expected to continue rising at a slower pace—around 3% in 2025.
Inventory – A Gradual Increase
Inventory is projected to grow slowly, as homeowners with sub-4% mortgage rates will continue to hesitate before selling. However, as higher rates become the “new normal,” more people will accept current conditions and list their homes. This should help gradually ease inventory constraints, but we aren’t expecting a major surge in supply.
Wild Cards – What Could Change the Forecast?
While most projections suggest a stable but tight market, several factors could shake things up.
A weaker labor market or sharper economic slowdown could force the Fed to cut rates more aggressively, bringing mortgage rates lower. Additionally, a narrowing mortgage rate spread could further ease borrowing costs.
On the other hand, persistent inflation, continued wage growth, or geopolitical risks—such as tariffs on building materials or labor shortages from mass deportations—could keep rates elevated or even push them higher.
My Prediction
I believe 2025 will be a transitional year. Mortgage rates will likely stay between 6-7% for most of the year, with a modest decline toward the low 6% range by year-end. Home prices will continue to rise, though more slowly, and inventory will see a gradual increase. The biggest unknown is the job market—if unemployment rises, the Fed will step in with aggressive rate cuts, which could shift this entire outlook.
Final Thoughts
So, that’s the 2025 housing market outlook—a mix of stability, unpredictability, and critical factors to watch.
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