Cash And Desperation To Drive Home Sales This Year

Economists, analysts, and researchers at the government-sponsored enterprise (GSE), Fannie Mae, reinforced their beliefs that affordability and lock-in effects remain the titular challenges for the mortgage industry in 2025, with any hope of housing recovery hampered by long-term rates expected to remain elevated due to broader economic momentum and rising Treasury yields.

"With a higher expected outlook for mortgage rates, both the lock-in effect and affordability constraints are expected to be more persistent than predicted in our December forecast," Fannie Mae's economists wrote in a revised forecast for mortgage market activity in 2025 and 2026.

The yields investors are demanding on government-backed debt have risen to 52-week highs, and those returns are a reflection of “real yields,” the revised forecast reads, not expectations that inflation may rapidly reaccelerate, as measured by the spread between 10-year Treasury yields and the 10-year Treasury Inflation-Protected Securities (TIPS) spread.

The implication, they explain, is that “bond markets still expect the Fed’s 2-percent inflation target to be achieved, and on a similar timeframe as before. However, the expected path for the fed funds rate going forward, required to achieve that goal, is now higher than previously expected after observing economic activity not slowing by as much as previously expected.”

The insights, along with updated projections for mortgage rates, home sales, and housing inventory, were published in the Fannie Mae Economic & Strategic Research (ESR) Group’s January 2025 commentary, released Wednesday.

The group now forecasts the 30-year mortgage rate to end 2025 near 6.5%, and 2026 near 6.3% — roughly 20 and 40 basis points higher, respectively, than shown in December’s outlook, as unrelenting affordability pressures, regional variations in rising inventory levels, and continued home price growth erode many prospective buyers' access to the market.

Accordingly, the ESR Group trimmed its 2025 total home sales forecast to 4.89 million (down 2.2% from 5 million) — “the continuation of a sales pace close to the 30-year low” — and its 2026 total home sales forecast to 5.25 million (down 4% from 5.47 million). The group calls their downward revisions for total home sales “comparatively modest due to our view that a large share of transactions is currently being executed by less interest rate-sensitive parties, such as cash buyers or those driven by major life events.”

The group reaffirmed its prior forecast of decelerating home price growth over 2025 and 2026. The combination of higher-for-longer financing costs and lower sales volumes led the ESR Group to lower its single-family mortgage originations forecast to $1.92 trillion in 2025 (down 2.5% from $1.97 trillion), and $2.27 trillion in 2026 (down 4.2% from $2.37 trillion).

Where the majority of those originations will occur is highly dependent on regional inventory increases that occurred over the course of 2024. Available inventory rose roughly 30% since the end of 2023, according to Realtor.com, but remains 19% below 2019 levels. Where inventory has increased the most, home price gains have slowed most rapidly.

Multiple reports published recently indicate that substantial, regional gains in for-sale listings is being driven by homes taking longer to sell, with particularly slow sales paces in southern states like Florida and Texas where new-home construction has accelerated in recent years.

“We interpret this to mean that in some regions, the pool of potential buyers on the sidelines has shrunk and there is not sufficient purchase demand from first-time buyers, in particular, at current prices and mortgage rates,” the ESR Group wrote. “Most regions in the Northeast and Midwest have experienced little improvement in the number of homes available for sale, in part due to a lower infusion of new homes into the housing stock.”

In regions where inventory has increased disproportionately, sales volumes are expected to rise disproportionately and “likely disproportionately contribute to the deceleration in home price appreciation,” the group added.

Affordability pressures may ease as median households incomes grow more rapidly than home prices in 2025 and 2026, though myriad factors are contributing to ongoing pressures on borrowers and prospective buyers. Reaching the highest levels since 2014, Intercontinental Exchange, Inc. (ICE) reported recently that taxes and insurance now comprise one-third of the typical mortgage payment on a single-family property.