When Will Mortgage Rates Drop? Not for Years, Wells Fargo Says

Spring may be coming, but economists at Wells Fargo don’t see much of a thaw for the housing market.

Interest rates for 30-year-fixed mortgages will likely average 6.9% in 2025 before ticking lower to around 6.5% the following year, Wells Fargo economists projected this week. The average mortgage rate was 6.7% last week after surging to more than 7% 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’

While Wells Fargo believes the Federal Reserve will cut interest rates three times this year, they don’t expect it to affect home borrowing costs much. It follows a pattern in 2024 when the Fed cut interest rates by a percentage point over the course of the year, but mortgage rates still pushed higher, mainly due to a rise 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 what we have is a new, old normal, if you will. 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.”

Rising Home Prices, Insurance Costs Diminish Outlook on Housing Affordability 

The outlook isn’t particularly rosy for other homebuying costs 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.

Home prices are expected to accelerate, with a projected annual increase of 4.3% this year before rising even higher in the following year, according to the report. Home price increases had cooled to below 4% in the latter months of 2024. High prices are hurting home sales, which are running about 22% below pre-pandemic levels, Senior Economist Charlie Dougherty said. 

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. 

Additionally, rising insurance costs are another expense that is adding to the pressure on the housing market. 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.

In addition, tariffs and immigration policy could also increase housing costs in the short-term, though favorable tax and regulatory changes might help spur demand in the long run, the economists said.