The Federal Reserve’s interest rate cuts in 2024 provided some relief for some borrowers, but mortgage rates have remained stubbornly high. As of January 2, 2025, the average 30-year fixed-rate mortgage climbed to 6.91%, its highest level in nearly six months, according to Freddie Mac. Even with the Fed lowering the federal funds rate by a full percentage point over the past four months, mortgage rates have not fallen proportionally, remaining about 0.3 percentage points higher than their 6.6% average in January 2024.
This disconnect is largely due to factors beyond the Fed's control, such as economic growth, inflation concerns, and fluctuations in the 10-year Treasury bond yield, which heavily influence mortgage rates. Economists predict meaningful relief for homebuyers is unlikely in 2025, with rates expected to remain elevated between 6% and 7%. Lawrence Yun, chief economist at the National Association of Realtors, forecasts the average 30-year fixed mortgage rate will hover around 6.5% throughout the year.
Adding to the uncertainty, are President Donald Trump's proposed economic policies, including sweeping tariffs on foreign goods and additional tax cuts, which could reignite inflation. If inflation accelerates, the Fed will almost certainly curtail rate cuts. However, some optimistic analysts suggest Trump's tariff threats may be strategic bargaining tools in trade negotiations rather than definitive actions. Inflation did increase over the past two months, so we are inclined to side with the Fed’s assumption that two rate cuts are prudent in 2025.
Despite economic policy uncertainty and increasing mortgage rates, home sales have increased substantially over the past two months. We attribute this rise to two main factors: more built-up inventory and the market’s acceptance of higher mortgage rates. Higher inventory has allowed potential buyers to more easily find the home that’s right for them with less competition. Additionally, buyers and sellers have broadly accepted that rates will be higher than they might like for some time, and waiting for rate drops isn’t worth the time anymore. There is also a potential third factor around economic sentiment; roughly half the country thinks more highly of the economy due to the incoming administration. Buyers are more likely to make a move
Local Lowdown
In the East Bay, home prices haven’t been largely affected by rising mortgage rates after the initial period of price correction from May 2022 to January 2023. Low, but growing inventory and high demand have more than offset the downward price pressure from higher mortgage rates. Year over year, for single-family homes, prices were flat in Alameda and up 9% in Contra Costa.
High mortgage rates soften both supply and demand, but homebuyers and sellers seemed to tolerate rates near 6% much more than around 7%. Mortgage rates rose significantly in the fourth quarter of 2024 and are now far closer to 7% than 6%. However, the promising build in inventory during the first nine months of the year was wiped out, and East Bay inventory fell near record lows in December. Near record low inventory points the East Bay to a seller's market.
Typically, inventory begins to increase in January or February, peaking in July or August before declining once again from the summer months to the winter. It’s looking like 2025 inventory, sales, and new listings will resemble historically seasonal patterns, and at more normal levels than last year.
As always, Arrive Real Estate Group remains committed to helping our clients achieve their current and future real estate goals. Our team of experienced professionals are happy to discuss the information we’ve shared in this newsletter. We welcome you to contact us with any questions about the current market or to request an evaluation of your home.
