It looks like 2025 could be almost as bleak as 2024 for the housing market, according to a report from First American.
The firm predicts that mortgage rates will remain above 6%, home price growth will flatten, and inventory will remain tight for the remainder of this year.
In the report, Odeta Kushi, deputy chief economist, forecasts that existing-home sales will improve slightly but remain well-below pre-pandemic levels.
Pre-pandemic, the five-year average pace of existing-home sales was 5.4 million (SAAR), Kushi says. Based on the average annual pace of sales from 2022 through 2024, the housing market is cumulatively approximately 3 million sales short of the pre-pandemic “normal.”
The mortgage rate lock-in effect will continue to keep inventory lean – and new home sales are expected to remain a bright spot.
“The most likely scenario in 2025 is that that the economy and labor market continue to cool, but not collapse,” Kushi says in the report. “And, if the Fed’s own projections are correct, we may see up to two rate cuts in 2025, down from the four they envisioned in September. Two rate cuts still keeps policy restrictive because the fed funds rate would still be above the Fed’s estimate of ‘neutral.’ As the Fed maintains a ‘higher-than-goldilocks’ stance, mortgage rates likely will also remain above 6 percent.”
“However, mortgage rates may drift lower from 2024 levels, in part driven by some narrowing of the mortgage rate spread as the Fed’s policy outlook becomes clearer,” Kushi says.
The only factor that might help make housing more affordable in 2025 – at least in certain markets – is new home construction.
“Markets with more building and inventory will experience greater affordability relief, which will, in turn, allow for increased sales,” Kushi says. “However, the 2025 housing market will continue to face significant headwinds preventing a return to ‘normal.’ Mortgage rate volatility will persist until the Fed’s policy outlook becomes clearer, and the mortgage rate lock-in effect will prevent a full housing market recovery. Nevertheless, the 2025 housing market is poised to make strides forward – offering progress, but still far from perfection.”
Photo: Billy Berg