Essential Economic Indicators That Could Lower Mortgage Rates

Homebuyers in 2025, particularly first-time buyers, struggle with one pressing question: "When will mortgage rates go down?" Along with this, many buyers are also wondering, "Are house prices going to go down? For many, lower mortgage rates are crucial to making homeownership more affordable. While the year began with some optimism, trends so far point to ongoing market uncertainty and high borrowing costs.

With rising concerns about home prices and mortgage rate expectations, you might be wondering what needs to happen for relief to arrive. In this article, we’ll get into the key economic indicators that influence mortgage rates and explore what must change before we see a drop in borrowing costs and a shift in housing affordability.

Key Economic Indicators to Watch:

1. Inflation and Federal Reserve Actions

Inflation is one of the primary economic factors influencing mortgage rates. When inflation is high, the Federal Reserve raises interest rates to control it. This, in turn, causes borrowing costs, including mortgage rates, to rise. However, if inflation decreases, the Fed may lower rates to stimulate economic growth, which could result in lower mortgage rates.

What needs to happen? A sustained decrease in inflation is required before the Federal Reserve will consider lowering interest rates. If inflation continues to cool, expect the Fed's rate cuts to lead to lower mortgage rates in the coming months.

2. Housing Supply and Demand

The supply of homes is another crucial factor in mortgage rate trends. With historically low housing inventory, demand continues to outpace supply, pushing home prices upward. As more homes become available, this pressure on prices could ease, creating a more balanced market.

What needs to happen? A significant increase in housing inventory is necessary to help stabilize home prices. Without enough homes to meet demand, the supply shortage could prevent any meaningful price corrections, even if mortgage rates fall.

3. Builder Sentiment

Builder sentiment, or the confidence builders have in the market, plays a pivotal role in housing supply. When builders are confident, they invest in new construction projects, which increases housing inventory. However, low builder sentiment—often due to rising material costs or economic uncertainty—leads to fewer new homes being built, further tightening supply.

What needs to happen? A rebound in builder sentiment would help increase the supply of homes, which could ease price pressures. Builders need to feel confident about the economy and the housing market to ramp up construction. This confidence could be bolstered by lower material costs, stabilized labor markets, and favorable economic policies.

4. Unemployment and Economic Growth

The state of the broader economy, including unemployment rates and economic growth, also impacts mortgage rates. A strong, growing economy typically leads to higher mortgage rates, as demand for loans increases and the Federal Reserve raises rates to curb inflation. On the other hand, an economic slowdown or higher unemployment could prompt the Fed to lower interest rates to stimulate borrowing and investment.

What needs to happen? A slower economy with higher unemployment could lead to lower mortgage rates. If economic growth slows or recession fears intensify, the Federal Reserve may decide to ease its monetary policy, which would likely lead to falling mortgage rates.

Future Outlook: Are Housing Prices Going to Go Down?

As for the future, mortgage rates may not decrease significantly until several of these economic factors shift in favor of lower borrowing costs. Most importantly, inflation must continue to decline, and economic growth needs to slow down enough to warrant rate cuts from the Federal Reserve.

Additionally, housing supply must improve to prevent price inflation from negating any benefits of lower mortgage rates. If builder sentiment improves and construction increases, the additional inventory could create a more balanced market and ease some of the pressure on home prices.

FAQs

1. Is it a good idea to buy real estate before a recession?

Buying a home before a recession depends on your financial situation and how long you plan to stay in the home. If you're financially unstable or plan to stay for only a short time, buying a home before a recession can be risky. However, if you're in a strong financial position and intend to stay in the home long-term, purchasing before a recession could be a reasonable decision.

2. What will cause interest rates to drop? 

Several economic factors can lead to a drop in interest rates. When inflation decreases, the Federal Reserve may lower its benchmark rates, which typically leads to lower mortgage interest rates. Additionally, if the economy slows down, unemployment rises, or financial markets weaken, the Federal Reserve may cut rates to stimulate borrowing and investment.

3. How does housing inventory affect mortgage rates and home prices?

Housing inventory plays a significant role in both mortgage rate expectations and home prices. When inventory is low and demand exceeds supply, home prices tend to rise. Conversely, if supply outpaces demand, home prices may stabilize or even decrease. While housing inventory doesn't directly influence mortgage rates, it can indirectly affect them. A balanced housing market might reduce buyers' willingness to take on higher mortgage rates, which could lead to a decrease in rates over time.