Although mortgage rates are decreasing, it's not anticipated that homes will become more affordable—here's the explanation.

Although mortgage rates are declining, it does not necessarily mean that homes will become more affordable in 2025.

As of Thursday, the average 30-year fixed mortgage rate decreased to 6.2%, a significant drop from its peak of 7.79% in May. This reduction means that many buyers will now save hundreds on their mortgage payments.

The increase in existing home sales in July, after five months of declines, is due to the savings of buyers bringing them back into the market. As a result, 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

Although lower mortgage rates aid buyers, the main driving force in the housing market is supply. Due to a persistent shortage of homes, estimated at 4 million by NAR, the supply of homes cannot meet the increasing demand, resulting in higher prices.

Maggie Kent, a real estate agent at CORE and sales at Eastlight Condominiums in New York, explains that while lower rates may temporarily improve affordability, the competition for limited housing stock can offset those savings, particularly in high-desirability markets like New York.

Home sales were at historic lows during the summer due to rising mortgage rates, which caused buyers to leave the market and made homeowners hesitant to sell, as they were holding onto their lower-rate loans.

Homeowners may find it challenging to justify moving and obtaining a new mortgage with a higher rate since roughly 86% of existing mortgages have rates of 6% or less.

Kent predicts that if mortgage rates fall below 6%, it will increase demand for homes, potentially leading to higher prices. She anticipates a "modest" median home price increase of 3% to 4% in the next year.

Mortgage rates are expected to fall as home prices rise

Financial firms and trade associations predict that mortgage rates will be in the high 5% range for 2025. Although the rates are closely linked to 10-year Treasury yields, they are expected to decrease after the anticipated Fed rate cuts, which will start this month.

Recent forecasts predict moderate home price increases.

• Goldman Sachs forecasts home prices growing by 4.4% in 2025.
• According to a survey of 100 housing experts, Fannie Mae forecasts a 3.1% rise in 2025.
• In the 20 largest U.S. cities, a median home price increase of 5.4% is predicted by a Reuters poll of 30 property analysts.

If a home costs $412,300 and experiences a price increase of 3% or more, it could result in additional costs of tens of thousands of dollars, which may offset the savings from a lower mortgage rate.

The housing market is affected differently by shortages, which may impact the increase or decrease of prices in the next year.

"According to Alex Shekhtman, CEO and founder of LBC Mortgage, the housing shortage is highly influenced by location. For instance, the severity of the shortage varies between Texas and Los Angeles. Each market has its unique set of dynamics."

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