Economic Developments - December 2024

1. Average mortgage rates will decline modestly but remain above 6 percent, with likely bouts of volatility

We forecast the average mortgage rate to remain above 6 percent in 2025. Sticky inflation and an apparent stabilization in job market gains have lowered market expectations for future interest rate cuts. Unless economic growth starts to slow significantly, we expect mortgage rates to remain elevated relative to pre-pandemic levels, moving only slightly downward to around 6 percent by the end of 2025.However, given ongoing uncertainty over the resilience of economic growth, the stickiness of inflation, and future policy changes, we expect bouts of volatility in mortgage rates next year. As seen over the past six months, the 10-year Treasury yield has oscillated greatly as stronger and weaker economic and inflation data were reported. Financial markets are trying to determine what the ultimate “neutral” rate for the fed funds rate will be, as well as navigate uncertainty over current and future economic growth. As more data is reported, and news around potential policy changes develops, we expect bouts of financial market volatility as bond markets reprice interest rate expectations.

Our baseline expectation is for economic growth and employment gains to slow modestly next year and for core inflation to continue to ease — but not to reach the Fed’s target until 2026. Still, there is considerable upside risk to our economic forecast stemming from the potential for continued resilience in consumer spending and stronger-than-anticipated productivity growth. However, a meaningful slowdown in immigration flows or significant tariffs point to downside risk to economic growth and upside risk to inflation measures. Potential tax and regulatory policy changes present both upside and downside risks that may also impact interest rates.

2. Existing home sales will remain near 30-year lows, but location matters

We forecast existing home sales to total 4.25 million in 2025, an improvement of 4.8 percent compared to our expected 2024 sales pace of 4.06 million, but still down 20.3 percent compared to 2019. We expect the increased inventory of homes available for sale will drive a modest improvement in existing home sales next year. According to the National Association of Realtors, the total number of homes available for sale at the end of November was 1.37 million units, up 19.1 percent from a year prior. However, given our mortgage rate outlook for rates to stay above 6 percent in 2025, we expect both constrained affordability conditions and the lock-in effect will continue to be the dominant themes limiting the recovery of existing home sales in 2025.

Affordability conditions remain at the most constrained levels since the mid-1980s. Additionally, we expect the lock-in effect to remain prominent, even if mortgage rates move closer to 6 percent. At the end of September, 58 percent of Fannie Mae single-family loans with a 30-year fixed rate mortgage had a rate under 4 percent, compared to 14 percent with a rate greater than 6 percent. The downward slope in the share of single-family loans with a rate below 4 percent and the upward slope in the share with a rate greater than 6 percent shows that, as expected, the lock-in effect will fade over time, but we believe the process is likely to be a slow one.

Even when interest rates briefly declined to around 6 percent in September, only a limited and brief pickup in mortgage applications and home sales occurred. Due to this muted response, we believe that mortgage rates near 6 percent are likely insufficient to spur enough additional demand or to encourage enough homeowners to sell, which is needed to thaw the housing market.

As discussed previously, though, there is significant regional variation in the number of homes available for sale, and some regions are likely to see more elevated sales in 2025 than in 2024. The comparatively loose markets tend to be those with strong homebuilding in recent years. Many of the Sun Belt states, including Florida and Texas, and parts of the Mountain West region and Pacific Northwest have inventory levels near or above pre-pandemic norms, according to Realtor.com. In contrast, the Midwest and Northeast have significantly fewer homes available for sale relative to 2019. In general, we expect that inventory levels will continue their gradual rise nationwide, with inventories in the Sun Belt remaining looser relative to inventories in the Northeast and Midwest.

3. New home sales will remain a bright spot in the housing market (where they can be built)

With the continued limited supply of existing homes for sale and favorable demographic-based demand for housing, we expect 2025 to be another solid year for new home sales. New home sales have averaged an annualized sales pace of 682,000 in 2024 through October, compared to an average sales pace of 595,000 from 2015-2019. We expect a similar trend in 2025. In the face of elevated mortgage rates, homebuilders continue to show a willingness to offer incentives like interest rate buydowns to move their inventories of new homes available for sale and to change the products offered to be smaller, more affordable homes.

Whereas historically the median sales price on new homes has far exceeded the median sales price on existing homes, that gap has narrowed in recent years. The price premium between the median price on a new vs. existing home sold has averaged about 4 percent in 2024, compared to an average of 28 percent between 2015 and 2019. Admittedly, this measure does not consider the difference in the geographic distribution of new homes sold, but part of the lower price premium is due to a decline in the median square footage of new homes from a peak of 2,519 square feet in the first quarter of 2015 to 2,158 square feet as of the third quarter of 2024.

New home sales, however, vary greatly by region. The South and Mountain West are places where land and zoning allow for more construction and thus make up the bulk of sales. Of the roughly 750,000 single-family housing permits year-to-date through October, 20 percent were issued in the metropolitan statistical areas of Houston, Dallas, Phoenix, Atlanta, and Charlotte. In 2025, we expect the Sun Belt region will continue to see significant homebuilding activity.

4. National home price growth will decelerate

While the continued lack of inventory for homes available for sale has helped to keep home price growth robust, we expect a continued deceleration in home price growth into 2025. We currently project year-over-year home price growth will be 3.6 percent in 2025 as measured by the Fannie Mae Home Price Index, compared to 5.8 percent in 2024. While mortgage rates will continue to present an affordability challenge, softening home price appreciation in 2025 could allow for nominal wage growth to exceed home price growth for the first time since 2011, helping to start a gradual improvement in homebuyer affordability conditions.

That said, there will likely be considerable regional differences. Regional variation in for-sale inventories is currently driving a diverging home price story. Of the FHFA top 100 metros, 75 experienced positive seasonally adjusted quarter-over-quarter home price growth in both the second and third quarters of 2024, a relatively small share historically outside of the Great Financial Crisis and the third quarter of 2022 when home prices declined nationally. We believe it is likely that regions with a greater inventory of homes available for sale will continue to experience weaker home price dynamics relative to the national average in 2025.

5. Multifamily housing will remain in a holding pattern

In the multifamily space, we expect 2025 to look a lot like 2024. While longer-term demographic trends remain supportive of multifamily construction over the next decade as the prime renter-aged population is expected to continue to grow, we expect below-average rent growth in the near term as additional units are completed. Depending on the measure, we expect rent growth to be between 2 and 2.5 percent in 2025. This will be helpful for renter affordability as it will represent the second-consecutive year of nominal wage growth exceeding rent growth in certain metros. However, slower rent growth will contribute to fewer new construction projects, especially in light of continued high longer-term interest rates.

Additionally, much of the regional variation present in single-family construction also applies to multifamily: Many of the Sun Belt metros experienced a building boom after the pandemic, and the growth in supply is affecting potential homebuyers’ buy-vs.-rent calculus. In many areas, renting is becoming more financially attractive than purchasing a home compared to several years ago, which means many would-be buyers are likely to decide to keep renting.