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Takeaways
- According to a report by Wells Fargo, mortgage rates will likely remain above 6% until 2026. The report also showed that affordability is still a major concern in the housing market.
- Economists said that home borrowing costs would likely remain high despite further interest rate cuts by the Federal Reserve.
- The bank’s economics also predicted that home prices will increase, as inventory shortages continue to be a problem in the face of tepid forecasts for housing construction.
Wells Fargo economists don’t expect much of a spring thaw in the housing market.
Wells Fargo’s economists said this week that interest rates on 30-year fixed-rate mortgages are likely to average 6.9% in 2025 and then drop to around 6.5% by the following year. The average mortgage rate last week was 6.7%, after surging up to more than 7.0% in January.
“It's going to be a challenging environment, in our view, over the next couple of years because we don't expect mortgage rates to, frankly, drop below 6%,” Wells Fargo economist Jackie Benson said.
Housing Market Returns to ‘New, Old Normal’
Wells Fargo does not expect the Federal Reserve to cut interest rates much this year. In 2024, the Fed cut interest rate by a percentage over the course the year but mortgage rates continued to rise, mainly as a result of an increase in Treasury yields.
Low interest rates like those offered in the years before the pandemic aren't returning any time soon, said Wells Fargo Chief Economist Jay Bryson.
“Unless something cataclysmic happens to the economy, we seriously doubt you're looking at a 30-year, fixed-rate mortgage of 3%,” Bryson said. “So, we’re in a new, old norm, if you like. An economy in which interest rates aren't zero. It's the economy that many of us lived through before the cataclysms of the global financial crisis and the pandemic.”
Housing affordability is affected by rising home prices, insurance costs
The outlook for other homebuying expenses isn’t very rosy either.
“The major issue here is the same one that's been weighing on the residential market for much of the past few years, and that's that affordability is extremely unfavorable for buyers,” Dougherty said.
According to the report, home prices are expected accelerate. A projected annual increase of 4,3% is projected for this year, before increasing even more in the following year. Home price increases had cooled down to below 4% by the end of 2024. Senior Economist Charlie Dougherty says that high prices are affecting home sales. They are 22% below their pre-pandemic level.
Meanwhile, home construction is expected to remain on par with today’s levels, which won’t fill the shortage of around 4 million homes that has stymied the market.
The rising cost of insurance is another expense that adds to the pressure on housing markets. The Wells Fargo economists pointed to S&P Global data that showed home insurance costs rose 10.4% in 2024, an acceleration from its average increase of about 3% between 2019 and 2022.
The economists noted that immigration and tariffs could also increase the cost of housing in the short term, but favorable tax and regulation changes may help to spur demand over the long-term.
