Although lower mortgage rates have revived hope in the struggling housing market, 2025 may not be much better than 2024.
Lower interest rates certainly boost affordability, but there are other components of buying a home that remain expensive.
Whether it’s the asking price that’s out of reach, high insurance premiums and property taxes, or other monthly bills that eat into your housing budget.
This explains why the outlook for mortgage origination for purchase loans remains largely bleak.
However, the emerging trend of rising mortgage refinancing volume is expected to become stronger by 2025.
Purchase volume reduced for 2024
New report from Any Emergent The study revealed that purchase loan transactions are expected to decline in 2024 in terms of the number of loans compared to 2023.
In other words, despite lower mortgage rates, the number of home purchase loans is now expected to fall below 2023 levels.
However, thanks to the increase in average loan size, the company believes that purchase loan volume will still see a modest increase of 3.5% year-on-year.
This is due to higher mortgage rates, which peaked about a year ago and have since fallen by about two percentage points.
But home prices remain high, and when combined with a 6% mortgage rate, high insurance premiums and high property taxes, the math often doesn’t add up.
Affordability problems are exacerbated by the continuing shortage of existing housing. There simply aren’t enough homes for sale, which has kept prices high despite low demand.
Refinancings are expected to rise by about 50% from their lows in 2023.
On the other side of the coin, mortgage refinancing is finally showing its strength thanks to the clear decline in mortgage rates.
It bottomed out in late 2024 when the 30-year fixed rate hit the 8% mark, with only a handful of cash-out refinances making sense for those who need payment relief (on other debt).
But since then, refinancing rates and terms have seen a huge rebound, with the latest mortgage versions becoming more “affordable” to save on monthly payments.
As we noted a week ago, refinancings at rates and terms rose 300% in August compared to the previous year, and the share of refinancing in total loan production rose to 26%, the highest figure since early 2022.
Growth is likely to continue through 2025 as mortgage rates are expected to fall further this year and next.
iEmergent said it “expects prices to finally start to decline in the coming months,” adding to the roughly 2% decline we’ve already seen.
While many have argued that interest rate cuts are mostly tied to mortgage rates already, which explains why mortgage rates have risen after the Fed cut, there is still a lot of economic uncertainty ahead.
The 50-point mark came as a surprise to many, and another one could be on the horizon in November, with a current probability of 60%. CME Fed Monitoring.
If the Fed turns out to be behind schedule, 10-year bond yields (which track mortgage rates) could fall more than already expected.
At the same time, there is still room for mortgage spreads to narrow as the market normalizes and adjusts to new low interest rates (and higher loan volumes in the future).
Refinancing volume is expected to rise by another 38% in 2025.
Looking ahead to 2025, the refinancing picture is expected to brighten even more, with such loans rising another 38% (in dollar terms) from 2024.
This trend is likely to continue due to interest rate and term refinancing, as interest rates continue to improve, and millions who have taken out loans since 2022 benefit from cheaper interest rates.
But it could also come in the form of cash-out refinancing, which would also become more attractive.
Even if a current homeowner has a 4% rate, something in the high 5% or low 6% range might work if they need the cash.
This may be a reflection of rising debt in other departments, as savings run out in the pandemic era.
Ultimately, homeowners have barely touched their home equity during this housing cycle, so there is an expectation that this will happen at some point, especially with home equity at record highs.
You may also see this in the form of second mortgage lending, with HELOC rates expected to drop another 2% as the prime rate is cut by the same amount over the next 12 months.
Meanwhile, iEmergent expects a meager 6.5% increase in purchase volume in 2025, pushing total dollar volume growth to just 13.3%.
As for why purchase lending is expected to remain relatively flat next year, it’s a broader economic story.
If economic growth continues to slow and a recession occurs, the weak labor market and high unemployment rates could dampen demand from homebuyers.
So, even if mortgage rates drop further as a result, you’ll have fewer willing and able buyers, despite lower monthly payments.
This explains the phenomenon of housing prices and mortgage rates falling simultaneously.
Maybe not, but this at least disproves the idea that there is an inverse relationship between the two.
In short, 2025 should be a better year for mortgage originators thanks to refinancing, but don’t get your hopes up that purchase loans will see a big jump thanks to lower interest rates.
Prior to creating this site, I worked as an account manager for a wholesale mortgage lender in Los Angeles. My experience working in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and current) home buyers better navigate the home loan process. Follow me on Twitter for the latest news.
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