Affordability, Lock-In Effects To Define 2025 Housing Market

Affordability challenges and persistent lock-in effects among homeowners who do not want to forfeit low mortgage rates are expected to keep housing activity subdued in 2025, according to the December 2024 commentary from the Fannie Mae Economic and Strategic Research (ESR) Group. 

The overall economy is expected to remain stable, and expand at a slightly faster pace through 2026 as it navigates elevated core inflationary pressures and heightened policy uncertainty.

Fannie Mae's Five Predictions For 2025

1. Mortgage rates are forecasted to stay above 6% in 2025, with only a slight decline to around 6% by year-end, due to persistent inflation and steady job market gains reducing expectations for rate cuts. Elevated 10-year Treasury yields reflect strong economic data and election outcomes, contributing to market volatility as investors assess inflation, economic growth, and Federal Reserve policy.
   
   Economic growth and employment are expected to slow modestly in 2025, with core inflation easing but remaining above the Fed's target until 2026. Risks to the forecast include resilient consumer spending, productivity gains, immigration slowdowns, tariffs, and potential tax or regulatory changes, all of which could affect inflation and interest rates.
    
2. Existing-home sales will remain near 30-year lows, depending on location. Existing home sales are projected to reach 4.25 million in 2025, a 4.8% improvement from the 2024 forecast of 4.06 million, but 20.3% below 2019 levels. Increased home inventory, up 19.1% year-over-year to 1.37 million units as of November, is expected to support modest growth. However, elevated mortgage rates above 6% are likely to maintain affordability challenges and the lock-in effect, limiting sales recovery.
   
   The lock-in effect persists, with 58% of Fannie Mae single-family loans carrying rates below 4% as of September, compared to 14% above 6%. While this dynamic is expected to gradually fade, it will do so slowly. Even when rates temporarily dipped to around 6% in September, the resulting increase in mortgage applications and home sales was minimal, suggesting that rates near 6% are unlikely to significantly boost demand or supply.
   
   The Sun Belt, Mountain West, and Pacific Northwest — areas with strong recent homebuilding — have inventories near or above pre-pandemic levels and are expected to see higher sales in 2025. In contrast, the Midwest and Northeast, with fewer homes available relative to 2019, will likely experience slower growth. Nationwide, inventories are expected to rise gradually, with regional disparities persisting.
    
3. New-home sales will remain a bright spot in the housing market (where they can be built). New-home sales are expected to remain strong in 2025, supported by limited existing home inventory and steady demographic-driven housing demand. Sales averaged an annualized pace of 682,000 in 2024 through October, up from 595,000 annually between 2015 and 2019, with similar levels anticipated for 2025. To counter elevated mortgage rates, homebuilders are offering incentives like interest rate buydowns and focusing on smaller, more affordable homes.
   
   The price gap between new and existing homes has narrowed significantly, with a 4% premium in 2024 compared to 28% between 2015 and 2019, partly due to a reduction in the median size of new homes from 2,519 square feet in 2015 to 2,158 square feet in 2024.
   
   Regional differences persist, with the South and Mountain West dominating new home sales thanks to favorable land availability and zoning. Of the 750,000 single-family housing permits issued year-to-date through October, 20% were concentrated in Houston, Dallas, Phoenix, Atlanta, and Charlotte. This trend is expected to continue in 2025, with the Sun Belt leading homebuilding activity.
    
4. National home price growth will decelerate into 2025. The continued lack of inventory available for sale has helped keep home price growth robust, but Fannie Mae experts expect a continued deceleration in home price growth. Next year, they project annual home price growth will be 3.6% as measured by the Fannie Mae Home Price Index, compared to 5.8% in 2024. 
   
   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.
    
5. Multifamily housing will remain in a holding pattern. The multifamily housing market in 2025 is expected to mirror 2024, with modest rent growth between 2% and 2.5% as new units are completed. This slower rent growth, coupled with nominal wage increases outpacing rents in some metros, will improve renter affordability but may dampen new construction activity, particularly with persistently high long-term interest rates.
   
   Regional trends in multifamily construction echo those in single-family housing. Sun Belt metros, which saw a post-pandemic building boom, are experiencing increased rental supply that influences the buy-vs.-rent decision. Renting is becoming more financially appealing than homeownership in many areas, prompting prospective buyers to continue renting.