Falling Mortgage Rates: Will Homebuyers Catch a Break?

The past few years have been great for existing homeowners who are now sitting on record levels of equity. But for would-be home buyers, the past few years have been nothing short of brutal.

Not only have home prices remained elevated, but mortgage rates, after falling to record lows during the pandemic, have been high since 2022. And although they’ve fallen a bit lately, it’s still a tough time to buy a home.

Should home buyers jump on falling rates?

At the start of the new year, mortgage rates were sitting just above 7%. As of this writing, the average 30-year mortgage rate is 6.67%.

That’s a small difference, but it’s not much of a difference. And between soaring home prices and still-high rates, it’s just not a good time to buy.

That doesn’t mean the situation won’t improve, though.

In September of 2024, mortgage rates fell close to 6% before creeping back upward. And if the Federal Reserve opts to lower interest rates later on in the year, we could see lower mortgage rates through the second half of 2025.

But as it stands now, home buyers are looking at the worst of all worlds.

It’s not a good time to buy from a housing price or mortgage rate perspective. And also, there’s not a whole lot of inventory to choose from. So even buyers who can swing a home purchase in today’s market may not get what they want.

And remember, part of the reason there’s such little inventory is because mortgage rates are so high. The homeowners who locked in low mortgage rates in 2020 or 2021, or refinanced into them, don’t want to give them up — especially not when they’re looking at paying almost 7% for a new mortgage.

But if rates come down as the year progresses, inventory could open up. That could ease home prices downward a bit.

Be careful when buying a home in today’s market

Even if the housing market improves during the second half of the year, it’s pretty fair to say that 2025 is not an optimal time to buy a home. There are just too many factors working against buyers.

First-time home buyers might have an especially hard time breaking into the housing market because they don’t have equity in an existing home they can tap and put toward a down payment.

If you’re going to buy a home this year, make sure not to get in over your head.

As a general rule, it’s a good idea to keep your housing costs to 30% of your income or less. But that doesn’t just encompass your mortgage payments.

When we talk about keeping housing costs to 30% of pay, that should include additional homeowner expenses like property taxes, insurance, and HOA fees. So all told, you may have a hard time sticking to that limit.

And to be clear, you don’t have to keep your housing expenses to 30% of your pay or less. Many people don’t.

But if you exceed that threshold, you may have a hard time keeping up with other bills. Or, your long-term financial goals might fall by the wayside. It’s hard to fund a retirement account, for example, when your housing expenses are eating up a large chunk of your income.

So before you take on the expense of a new home this year, run the numbers and see what you’re comfortable with. And recognize that things could get better in the coming year, so it might pay to wait to buy if you’re in a decent housing situation now and don’t have to be in a rush to move.

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