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In June, the median existing U.S. home sold for $426,900, according to the National Association of Realtors. That marked the 12th straight month of year-over-year home price gains.
But there's a reason home prices have been so high. And it boils down to elevated mortgage rates .
That said, there's reason to believe that mortgage rates will soon start to come down. And because of that, it's likely that home prices will be less expensive in 2025 than they are today.
Why home prices are so high
You'd think that today's mortgage rates would be pushing buyers out of the market, leading to a drop in home prices. But the reason housing prices are high is that there's still more buyer demand than there is available inventory. Housing inventory is low because mortgage rates are elevated. Yes, it's a vicious cycle.
It's hard to motivate people to sell their homes today because doing so, in many cases, means swapping a more affordable mortgage for one with a much higher rate. A lot of today's buyers refinanced their mortgages in 2020 or 2021 when rates fell.
So now, many people are able to pay off their remaining loan balances at 3% or less. Since the average 30-year mortgage rate is 6.47% as of this writing, it's easy to see why someone with a 3% mortgage wouldn't want to give it up and pay more than double instead.
Why relief is in sight
Once mortgage rates start to fall, we should see home prices start to come down as lower mortgage rates are likely to drive more people to sell.
Meanwhile, a big reason mortgage rates are stuck where they are is that the Federal Reserve's benchmark interest rate is stuck at a 23-year high. But the Fed is expected to start lowering its benchmark interest rate soon. And once that happens, mortgage rates should follow.
From there, housing inventory should start to improve, narrowing the current gap between supply and demand and leading to lower home prices. If you've been struggling to afford a home this year, relief may be in sight for 2025.
If you're serious about buying a home, then it pays to put yourself in the best position. That means boosting your down payment funds and raising your credit score so you can get approved for a mortgage and qualify for the best rates.
Have realistic expectations
There's a good chance it will be cheaper to buy a home in 2025 than it is today. But that doesn't mean current home prices are going to plummet. It's important to have the right mindset as you embark on a home search in the new year.
One thing you should aim to do is keep your total housing costs to 30% of your take-home pay or less. And that 30% should include your mortgage payments, homeowners insurance, and property taxes -- basically, any predictable recurring housing expense you can anticipate.
Even with lower home prices, you have to be careful in your house search. It can be tempting to buy something that's beyond your financial reach. The last thing you want is to jump on a home-buying opportunity only to regret it after the fact.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy .
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