Housing in 2025: Rates will drop under 6%, capital gains exemption will double
Ready for a new year and a reinvigorated housing market?
Here are my 2025 predictions for the market.
Freddie Mac mortgage rates are going to drop below 6% and stay in the mid-5s for most of the year. This year, we saw rates top out at 7.22% on May 22. Rates bottomed out at 6.08% on Sept. 26.
Also see: California homebuying jumps 20%, biggest gain in 41 months
The economy is strong, but Trump has vowed to raise import tariffs. This should mean rates are more likely to go up than come down. So, what gives? There’s almost $18 trillion in consumer debt, an all-time high. I see a slowdown in consumer spending. And I see a smaller slowdown in the economy. Hence, rates will dip below 6%.
The Federal Reserve will cut short-term rates three times next year, as it cut rates three times this year. We will see a one-quarter drop with each cut. As of today, the prime rate is at 7.5%. By this time next year, it will be 6.75%. Prime affects the cost of borrowing for car loans, credit cards and home equity lines of credit.
The capital gains tax exemption will double for a single filer to $500,000 from $250,000 and to $1 million from $500,000 for a married couple.
House Rule 1321, the More Homes on the Market Act, was introduced in Congress on March 1, 2023. It’s still in committee, though.
If you’ve lived in a primary residence for two of the last five years, you are eligible for this exemption, assuming you were to sell.
For example, let’s say you and your spouse paid $1 million for your home eight years ago. You are selling it today for $2.5 million.
Related: Mortgage rates above 6% next year is consensus forecast
Major home improvements over the years and selling costs total $500,000. Those expenses are deductible from any capital gains tax. If your profit was $1.5 million less the $500,000 deduction, less the $1 million capital gains exemption, then there’s no capital gains tax.
As it stands now, with a $500,000 exemption (the same amount since the law’s 1997 inception), you’d be taxed on as much 20% of that $500,000 gain. That’s $100,000.
Often, I hear from consumers that they don’t want to sell because they don’t want to give the government so much money in yet another tax.
More importantly, the More Homes on the Market Act would make housing more available for both first-time buyers and move-up buyers. Effectively, it will bring liquidity to a very locked down, illiquid housing market.
Southern California median home prices will increase 8% to 10% next year, should rates drop into the 5s and the capital gains tax exemption double.
According to November 2024 year over year CoreLogic figures, the Orange County median price gained 11.6%, San Diego County 6.2%, Riverside County 5.4%, San Bernardino County 3.2%, and Los Angeles County 1.6%
Another prediction: You’ll have a lot more homes to choose from in 2025. Listings will go up 20%.
Southern California currently has 29,451 homes listed for sale, according to Reports on Housing. One year ago, the region had 21,834 listings, so we’ve seen a 35% increase this year.
President-elect Donald Trump and the Republican-held Congress likely will move to privatize Fannie Mae and Freddie Mac. It won’t happen in 2025 though, and is more likely in 2026. Both agencies have been in government conservatorship since 2008.
Nationwide, mortgage delinquencies will spike as more consumers struggle to make ends meet. The cost of homeowners insurance has ballooned in many parts of the country. Utilities and groceries are contributing to the strain as well.
Mortgage volume, purchase and refinance loans will increase significantly to $2.5 trillion. The Mortgage Bankers Association estimated $1.79 trillion of funded mortgages for 2024. The MBA estimate for 2025 is $2.3 trillion.
Freddie Mac rate news
The 30-year fixed rate averaged 6.72%, 12 basis points higher than last week. The 15-year fixed rate averaged 5.92%, 8 basis points higher than last week.
The Mortgage Bankers Association reported a 0.07% mortgage application decrease compared with one week ago.
Bottom line: Assuming a borrower gets the average 30-year fixed-rate on a conforming $806,500 loan, last year’s payment was $27 less than this week’s payment of $5,215.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.99%, a 15-year conventional at 5.75%, a 30-year conventional at 6.5%, a 15-year conventional high balance at 6.125% ($806,501 to $1,209,750 in LA and OC and $806,501 to $1,077,550 in San Diego), a 30-year-high balance conventional at 6.875% and a jumbo 30-year fixed at 6.75%.
Eye-catcher loan program of the week: A 30-year mortgage, with 30% down locked for the first 5 years at 5.99% with 1 point cost.
Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com.