Mortgage rates have dropped over the early months of 2025, offering homebuyers an opportunity for some borrowing relief if they move ahead with the big-ticket purchase.
The housing market remains sluggish and wider economic uncertainty looms, however. President Donald Trump’s tariffs threaten to upend global trade and tip the U.S. into a downturn, experts said. Federal Reserve Chair Jerome Powell warned on Wednesday of a possible resurgence of inflation, which could trigger higher interest rates.
The mixed signals pose a quandary for homebuyers: Is it the right time to get into the market?
Lower mortgage rates ease the financial pain for prospective homebuyers, presenting an incentive at a moment when it appears unclear whether borrowing costs will drop any further, some analysts told ABC News.
A tight housing market and a cloudy economic outlook may give homebuyers pause, however, as they weigh the large expense with financial conditions in flux, analysts added.
“It’s still a tough environment to find a house,” Lu Liu, a professor at the Wharton School at the University of Pennsylvania, told ABC News. “On the other hand, it’s unclear whether that environment will get any better.”
The average interest rate on a 30-year fixed mortgage stands at 6.76%, marking a decline from 7.04% in January, FreddieMac data shows. The current level of mortgage rates is roughly a percentage point lower than a recent peak attained in the fall of 2023.
Each percentage point decrease in a mortgage rate can save thousands or tens of thousands in additional cost each year, depending on the price of the house, according to Rocket Mortgage.
“Mortgage rates have seen substantial decline,” Jessica Lautz, deputy chief economist and vice president of research at the National Association of Realtors, told ABC News. “It’s a measurable difference.”
Mortgage rates closely track the yield on a 10-year Treasury bond, or the amount paid to a bondholder annually. Bond yields are shaped in part by expectations of inflation, some experts said.
Since bonds pay a given investor a fixed amount each year, the specter of inflation risks devaluing the asset and in turn makes bonds less attractive. If inflation were to rise, those annual returns would get cut down as price increases erode the purchasing power of the fixed payout.
Bond yields rise as bond prices fall. When a selloff hits and demand for bonds dries up, it sends bond prices lower. In turn, bond yields move higher.
The Fed has cautioned about a possible tariff-induced rise of inflation, which could trigger higher bond yields and, in turn, increased mortgage rates. But a simultaneous slowdown of the economy may complicate potential rate hikes, since high interest rates could worsen a downturn.
“There’s a risk of upward pressure on inflation, which could drive up yields,” Liu said. “Maybe there’s a wait-and-see about a possible economic slowdown, which could lower rates.”
“It’s very hard to predict,” Liu added.
Homebuyers face another challenge: A slow housing market.
Existing home sales dropped nearly 6% in March compared to the previous month, National Association of Realtors data showed.
The housing market is suffering from a phenomenon known as the “lock in” effect, some experts said.
While mortgage rates have fallen, they remain well above the rates enjoyed by most current homeowners, who may be reluctant to put their homes on the market and risk a much higher rate on their next mortgage.
In turn, the market could continue to suffer from a lack of supply, making options limited and prices sticky.
An influx of new homes has eased some of the supply crunch, but construction of new homes remains well short of demand, Lautz said.
“There’s inventory coming in but it doesn’t mean the inventory-supply crisis is over,” Lautz added. “We know we need a lot more inventory in the U.S.”
Despite these complications, homebuyers may still find it worthwhile to enter the market, some experts said.
Limited supply of homes increases the likelihood that a given purchase will retain or increase its value, offsetting the costs and easing some of the risk, Ken Johnson, a real estate economist at the University of Mississippi.
“Prices should be stable or rise,” Johnson said. “You almost certainly won’t see a crash because we’re woefully short on roofs to live under in the U.S.”
In the event mortgage rates fall even further, homebuyers retain the option of refinancing at the reduced interest rate, Johnson added.
“As some say, ‘You get engaged to the mortgage rate and married to the refinance,'” Johnson said. “People may be looking now because they need to get into a home.”
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