With mortgage rates easing marginally last year, potential homebuyers may be wondering if now is the right time to get into the housing market. However, several uncertainties remain: Will mortgage rates go down? Will the U.S. housing shortage ease? And will the recent rapid growth in home prices slow?
The good news is: Morgan Stanley strategists anticipate that mortgage rates could fall with Treasury yields over the next two years and home prices may decrease slightly amid increased housing supply.1 That, however, does not necessarily mean a return to the pre-pandemic era of more affordable mortgages and home prices.
If you’re considering entering the market this year, here’s what you should know.
How Did Mortgage Rates Get So High?
Investors and potential homebuyers have experienced rapid change in recent years as interest rates plummeted, then shot back up, only to begin declining again.
After the 2020 pandemic, the Federal Reserve Board (the Fed) slashed rates, which helped drive 30-year mortgage rates to a low of 2.65% in early 2021,2 sparking a homebuying surge. By October 2023, due to high inflation, rates soared to nearly 7.80%,2 which significantly impacted the U.S. housing market by making homes less affordable.
In 2024, as inflation settled closer to the Fed’s 2% target, the central bank reduced its benchmark rate a full percentage point. However, Fed rate cuts don’t necessarily lead to lower mortgage rates. With longer-term yields fluctuating throughout 2024 and into 2025, the 30-year fixed ended January 2025 just below 7%2 —lower than in mid-2024, but still far above pre-pandemic levels.
Will Mortgage Rates Go Down in 2025 and 2026?
Morgan Stanley strategists forecast that in 2025, mortgage rates could fall with Treasury yields, and home prices could decrease slightly amid increased housing supply.1 However the magnitude of a potential drop in mortgage rates is uncertain.
In 2026, the strategists say, a slowing in U.S. gross domestic product (GDP) growth could take Treasury yields lower and mortgage rates with them, further helping affordability.1
The potential declines could translate to improvements in housing affordability. For example, for a $1 million home, the monthly cost today could be $5,322 at a 7% rate, versus $4,925 at a 6.25% rate—roughly a $397 monthly difference.3,4
Where Will Home Prices Be in 2025 and 2026?
Homes are still generally less affordable today than they were just five years ago, with average prices up about 30% since early 2020.5 That means that a $1 million home in 2019 could now list for $1.3 million.
With mortgage rates still high by recent historical standards, many homeowners who already secured much lower rates have a strong incentive to hold onto their current home. This creates a “lock-in effect” that has helped sustain upward pressure on prices in recent years as far fewer existing homes came on the market. (Some homeowners may explore a cash-out refinance to withdraw equity and capitalize on the surge in home equity values following the pandemic.)
Looking ahead, Morgan Stanley strategists anticipate a continued slow increase in residential investment through 2026, with a rapid rise in housing starts (new home construction), new home sales and more turnover in existing home sales.1 These changes may drive more housing inventory, which could help ease some of the pressure on housing prices.
Is Now the Right Time to Get Back in the Housing Market?
Ultimately, whether now is the right time to buy or sell a home can be just as much a personal decision as it is an economic one. For example, a young couple starting their family may be willing to pay a premium to get into a specific school district, while a retiree may be ready to buy their dream vacation home while they can enjoy it. For many of today’s buyers, there is also the hope that they can refinance down the road to lower their costs, making it an easier choice to buy at a higher rate now.
Whatever your circumstance, your Morgan Stanley Financial Advisor can help you understand your financing options and evaluate how today’s mortgage rates and home prices could affect your overall financial plan.
