Outlook: HSH's 2025 Mortgage & Housing Forecasts

Mortgage rate outlook

Statement on last year's Outlook: Fair. We expected a range of 6.30% to 7.30%; markets provided 6.08% - 7.22%, with the late summer bond market rally pushing rates briefly lower than expected.

The prospect for lower mortgage rates in 2025 is somewhat better than was the case in 2024. That said, the conditions that might promote significantly lower rates -- recession, economic emergency, inflation running well below target -- just don't seem all that likely to occur, limiting the downside for mortgage rates in the coming year.

On the positive side for helping rates to decline in 2025 is that inflation is already low and should head at least a bit lower next year. When we were writing the 2024 Outlook in December 2023, core PCE was running at a 3.5% annual rate; it is presently at a 2.8% annual clip. While still above the Fed's target of 2%, even gently fading price pressures from this point forward should allow long-term interest rates to settle. However, there may be a wildcard for inflation, most probably coming from new tariffs.

Labor market conditions are also likely to continue to settle. We have seen both the number of job openings and the number of hires throttle back for a while now; this is to be expected in an economy already running near full employment, and a generally-softer trend for hiring and an unemployment rate remaining above its post-pandemic bottom of 3.4% should help exert downward pressure on interest rates in the coming year.

The economy has been growing very solidly for the last two years now, recovering as it has from the pandemic upending. That recovery is largely complete now, but new challenges are coming to trade, tariff and labor policies that might change the solid trend for growth, at least for a time.

While there are of course uncertainties regarding all of the above, it is most likely that the Fed will continue to trim interest rates. The open questions of course are "how quickly?" and "by how much?" but a general trend of moving monetary policy toward neutral seems most likely. With the economy's "floor" for interest rates being lowered, other interest rates (including mortgage rates) should find space to fall.

As we write this outlook, the average offered rate for a conforming 30-year FRM (per Freddie Mac) is a little below the 7% mark, off its recent peak but about as high as it has been five months. A retracement of the run-up of the fall would see mortgage rates to decline back into the close-to-six-percent range; that may happen, but it is likely to take some time to do so.

The remaining bit of 2024 notwithstanding, and looking out over 2025, we think the average offered rate for a conforming 30-year FRM in 2025 should probably be able to run in a range of 5.8% to 6.8%, with the lower end more likely to be seen if the labor market deteriorates or the economy falters.

The Fed / Monetary Policy

Statement on last year's outlook: Fair. Last December, we thought there would be perhaps two or three rate cuts coming in 2024, and in 2024 there have been 100 basis points in reduction in the federal funds rate, a number typically equivalent to four cuts by the Fed, as the central bank began its new cycle with a larger-than-typical 50 basis point reduction.

The Fed has felt comfortable lowering rates so far in its new policy cycle. The decline of inflation over time had actually been increasing the amount of economic restriction that high short-term rates impart, as the so-called "real" (after inflation) funds rate actually increased over time due to softening price pressures. As such, there has been ample room to cut without risking an economic or inflationary boost.

That's less likely to be the case in 2025. To start with, while the Fed is on a path for monetary policy to "neutral", where the level of policy rates neither creates economic drag or provides stimulus, the truth is that it doesn't exactly know where "neutral" lies at any given time.

The "neutral" rate for policy (referred to by the Fed as "r-*" or "r-star") can't be directly observed, but only inferred from how the economy and inflation are reacting to a given level of policy rates. Nominal rates above r-* should create drag on economic growth and help lower inflation, while those below it should provide lift to growth and prices. After the financial crisis, the Fed thought neutral was perhaps a federal funds rate of 2-2.5%, but now appear to believe that this may be 3% or so over the long run. Because there are various things impacting the economy at any given time, Mr. Powell said at the December post-meeting press conference that "you can't do a straight read between those longer-run numbers that we write down and what we think the appropriate policy should be."

The Fed currently thinks that the present level of the funds rate is still "meaningfully restrictive" per Fed Chair Powell, so somewhere above neutral. But if the funds rate is now 4.25% to 4.5% and neutral might only be as low as 3%, there's considerably less room to cut rates. Based on the strength of the economy, solid labor markets and core PCE inflation that seems to have plateaued at a level above the Fed's target, it may be that the current stance for policy isn't all that restrictive. Minutes from the November 2024 FOMC meeting highlighted this: "Many participants observed that uncertainties concerning the level of the neutral rate of interest complicated the assessment of the degree of restrictiveness of monetary policy and, in their view, made it appropriate to reduce policy restraint gradually."

In September, the Fed members updated their expectations for monetary policy for 2025 and beyond. At that time, the median forecasts for policy rates suggested a full percentage point trim over the course of next year. By December, this outlook had changed along with projections for inflation, and Fed members now think cuts will total only a half-percentage point in 2025.

While it's both hopeful and encouraging for potential borrowers that rates will likely be lower next year, it's also important to temper that enthusiasm. The reality is that a 3.9% median federal funds rate would return it only to about where it was for a time in 2022, when rates were being lifted quickly. Prior comparables were seen back in 2008, when rates were being slashed to address the growing financial crisis, or 2005, when monetary policy was in a long upcycle.

Aside from adjusting interest rate policy, the Fed continues to also still reduce the size of its balance sheet. Reducing mortgage holdings relies on two things -- mortgage balances being paid down by homeowners, or homeowners refinancing and taking a loan off the Fed's books. With mortgage rates high, refinancing activity has been nearly non-existent for much of 2024, leaving mostly amortization of loans to trim the portfolio. The Fed has a goal to reduce holdings by $35 billion by "runoff" each month; however, since the program's inception, redemptions have averaged only about $15 billion per month.

Back when the QT program started, the Fed held $2.740 trillion in MBS; as of December 12, 2024, this has been pared down to $2.249 trillion. By now, if redemptions and refinances had gone according to expectations, the Fed should be holding about $1.710 trillion, so somewhat less than half the expected amount of MBS have been retired from the Fed's portfolio.

The Fed also has a stated goal of (eventually) only holding Treasury bonds, but the pace of MBS runoff has been very slow. If runoff was to actually occur at a $35B/month rate, it would take about 70 months to erase MBS holdings. At the present pace, it will be 149 months -- more than 12 more years -- to get the Fed to zero MBS holdings. Even to just return MBS stockpiles to where there were before the pandemic QE kicked in (about $1.3T) it will take another 63 months at the current rate of retirement. Any of these paces is likely too slow for the Fed, and is also the reason why they have noted that portfolio runoff -- aka "Quantitative Tightening" -- will continue even as policy rates continue to be lowered.

Given the low level of new MBS issuance (due to the rate climate this year), it's certainly possible the Fed would entertain actually selling off some of its holdings to reach its "no MBS" goal in a more timely manner. Since loans the Fed holds have below-current-market interest rates, this would require realizing losses on sales, which isn't an especially good look, and so probably won't be considered very soon. At the same time, investor appetite for MBS hasn't been all that stellar this year, with banks and others selling their holdings at times, pressuring market mortgage rates higher. Still, and once the path for interest rates becomes more certain, there's a chance that discussions of MBS sales could surface.

As far as short-term interest rates go, after a rapid-fire sequence of cutting to close 2024, we think that there will be one to three cuts in rates by the Fed next year, but that the Fed will hold off cutting interest rates for a while into 2025. Some have described this likelihood as a "hawkish pause", but we think it's simply more of a return to normal policy adjustments as determined by incoming data.

We suspect that, provided the economy and inflation don't leap or plummet that cuts in rates will come in March and September at meetings accompanied by updated SEPs. Should they emerge, signs of slower growth, slower inflation or flagging labor markets would add the possibility of a third cut late in the year. Conversely, inflation that doesn't resume its retreat in early-mid 2025 (or increases during that time) might mean only one single cut in rates late in the year.

Fannie/Freddie/FHFA/FHA

In Washington, it's hard enough to try to get things fixed that are broken, let alone try to address things that work but might be improved. As we close 2024, it's now been 16 full years that Fannie Mae and Freddie Mac have been wards of the government, and they function well enough that few elected officials are interested in addressing reformation of the GSEs. All of the remake/reform/release ideas and efforts of the years between the housing collapse and now seem to have gone by the wayside, and many of the champions of those ideas are no longer even in Congress.

But is change afoot? When the incoming administration was last in power, a strong push was made by head of the FHFA to "reform, recap and release" Fannie Mae and Freddie Mac, turning them back into private/quasi-private companies. Ambitious capital goals were established, and a working pathway to release was laid out, but the 2020 presidential election brought change again, and those working plans were abandoned.

We'll need to see how the focus on housing changes again under the new administration. Certainly, there is plenty of speculation about what may come. We think there's a good chance that GSE recap and reform efforts will be dusted off and reviewed again. However, as since Fannie and Freddie are functioning and profitable for the government, there's little urgency to push for change, as the new group of regulators and overseers will likely have a full four years to refine and start to execute any plans.

At least at the moment, the GSE mission for 2025 includes objectives to "Promote equitable access to affordable and sustainable housing, including efforts that further energy efficiency and resilience," to "Improve outcomes for homebuyers with initiatives to promote fair lending, combat predatory practices, reduce closing costs, modernize appraisals, and expand access for creditworthy borrowers in a safe and sound manner" and "Support the stability of the housing finance system by ensuring the regulated entities provide liquidity to the mortgage market across the economic cycle and strengthening the Enterprises’ financial condition and risk management."

If you have an interest, how well the GSE are achieving their statutory goals and more can be seen in the FHFA's annual report.

For borrowers in the mainstream, about the only likely change for 2025 was another increase in the conforming loan limits for 1-4 family homes. The maximum loan amount that applies across all markets is now $806,500, but can be as high as $1,209,750 in certain high-cost housing markets. If reform to the enterprises should ever come, one consideration might be to start reducing the conforming loan limits. Even with record-high existing home prices, the current limit is nearly double the loan amount needed for a borrower to purchase a median-priced existing home with just a 5% down payment, leaving very few customers for the truly private mortgage market to profitably serve.

Outside of a continued focus on "mission" loans and "affordability" efforts, it seems likely that there will be little change to consider at the GSEs in 2025, but we may see some change in stance as 2025 progresses. For example, a non-"mission" program that could face the chopping block under a new regime could be the pilot program that allows the GSEs to purchase closed-end second mortgages. We'll have to wait to see what focus a new FHFA leader may have with regards to Fannie and Freddie.

We could see a change to the FHA program in 2025, though. Back in 2023, the FHA's Mutual Mortgage Insurance Fund (MMIF) was capitalized at a level more than five times the statutory requirement, and a modest change to recurring FHA mortgage insurance premiums was made. For the 2024 fiscal year, the MMIF capitalization ratio actually expanded further to 11.47%, a 0.96 percentage point increase over 2023 and now almost six times the required level.

Could another cut in MIP premiums come in 2025? It's not impossible, but is unlikely, as the last cut in premiums happened only a fairly short while ago. Since both the upfront and annual MIP are percentage-based fees; fast-rising home values have helped money flow into the fund, while a fairly solid economy has helped losses due to default remain low. Rising home values also reduce the potential for loss on the FHA's HECM portfolio, a segment that was a trouble spot up until 2020, when leaping home values turned this segment from a negative to a positive in terms of the MMIF.

While there will always be calls to reduce MIP premiums to help lower entry or recurring costs for homeowners, it's worth considering if the next change might be to allow for MI premiums to be canceled when the loan's LTV ratio falls below 80%, as is the case in the conventional market. Presently, borrowers who make less than a 10% down payment on a 30-year FHA loan cannot cancel their MI, regardless of the loan's LTV ratio (with 10% down or more, MI can be canceled after 11 years). For many existing FHA borrowers, the only way to eliminate their costs for mortgage insurance is to refinance out of the program. However, high mortgage rates in the market make this an unlikely happenstance.

Even assuming zero home price appreciation, an FHA borrower starting with a 3.5% down payment should be at an 80% LTV level at approximately payment 127, or about 11 years after the loan is originated. By that point in the loan (and assuming payments have been made on time) there's likely to be little risk to the MMIF; of course, also by that time, it's more than likely that many FHA loans will have been refinanced into conventional mortgages to eliminate the MIP cost.

Concerns that inflated home values might let "riskier" borrowers opt out of paying for insurance can be fairly easily addressed. For example, any automatic cancellation could even be based purely on the number of payments, not home value appreciation, and so would likely only happen for the relatively few borrowers who have remained in their loans for an extended period of time. Should there be concerns about borrower risk profiles, perhaps a credit-score standard might also be utilized, in that a borrower could terminate FHA MI premiums if conditions are met but only if their credit score at the time of the cancellation request meets a given threshold. Combinations could also be employed, such as a mix of length of ownership/outstanding balance reduction/property price appreciation/credit score.

Allowing the MIP to be canceled using guidelines similar to the conventional loan market would be a low-risk way to help reduce costs for homeowners. It would also likely serve as a kind of "retention" tool for the FHA pool, since borrowers with solid equity stakes (and therefore less likely to cause future loss) would have less incentive to refinance out of the program.

Mortgage Regulations

Last year, there was a chance that the primary regulator for mortgages (the Consumer Financial Protection Bureau) would face an existential threat, all related to how it was funded. However, on May 16, the Supreme Court upheld the constitutionality of the funding mechanism for the Consumer Financial Protection Bureau; in a 7-2 opinion by Justice Clarence Thomas, the court said the statute that funds the bureau through the Federal Reserve instead of congressional appropriations satisfies the U.S. Constitution’s appropriations clause.

There's no way to know how the regulatory landscape would have been upended if the CFPB's prior decisions and authority were declared invalid, but crisis averted. The Bureau rolled on unaffected, and mostly spent the year mortgage-wise focusing on enforcement actions. That said, they did lean into mortgage "junk fees" and looked to streamline mortgage sevicing/loss mitigation (e.g. modifications, forbearance) efforts. More recent missions have targeted brokers of sensitive financial and other personal information, a lot of which is exposed during the mortgage-shopping and origination process. If you have an opinion on this, you can comment on this until March 3, 2025).

But what of changes to regulations come 2025? The CFPB's director serves at the discretion of the president, which is how the present head (Rohit Chopra) got the position. It is not yet clear if president-elect Trump will fire Mr. Chopra and install a new leader, but the odds of this occurring are pretty good.

As such, it's hard to know what priorities a new administrator might have. Most likely is a less-aggressive stance when it comes to enforcement, at least as far as penalties go. It's also certainly possible that there may yet be some rulemaking that comes as a result of the landmark real estate compensation case last year.

Beyond that, it may be a pretty quiet year for mortgage rulemaking in 2025. Certainly, this might change if the now-forming Department of Government Efficiency begins to comb through the labyrinth of regulations the CFPB manages, but this seems unlikely, at least in the coming year.

Underwater mortgages, the continuing saga

The last few years have featured extraordinary increases in home values, and that was again the case in 2024. Even so, it is reckoned that there are still places where the amount of a homeowner's mortgage exceeds the value of their home.

Potential homebuyers would love to see home prices easing, at least a little, while homeowners -- particularly those who bought homes at or near peak price levels -- are hoping for exactly the opposite. If home prices should begin to retreat, the number of folks who owe more on their mortgages than their homes are worth would increase. Even if not underwater, a loss of equity due to softer home values might make it hard for wanna-be sellers to exit properties without losing money.

Even with tremendous gains in home values over the last few years, the issue of at least some borrowers in some places holding loans in excess of the value of their home persists. Cotality (formerly CoreLogic) reported that in the third quarter of 2024, the total number of residential properties with negative equity was still included 990,000 million homes, or 1.8% of all mortgaged properties. While the figure is improved from years past, it is still uncomfortably high.

Property prices remain well supported, but that's not to say they are rising everywhere. Depending on your preferred gauge, you'll likely find at least some markets with lower values now than was seen last year, especially once you look beyond the top 20 metro areas. For example, the data we use to power our Home Value Tracker shows that 20 of 405 housing markets (~5%) had lower values in the third quarter of this year when compared against a year ago. As well, a seasonally-adjusted HPI data set from the Federal Housing Finance Agency showed 9 of the top 100 metros (9%) with value reductions using the same 3Q23 to 3Q24 comparison. Even a review that uses existing home prices in the top 50 metro areas from data provided by the National Association of Realtors revealed that 7 of them had lower prices in the third quarter of this year than last (and a total of about 8% of the 226 metros they track did, too).

In most cases, declines were seen in formerly high-flying metros, such as Austin TX or Boise ID, markets which may have become a little overvalued. It is markets such as these that will likely contribute to more homeowners being underwater; however, this unfortunate happenstance is only likely to affect homeowners who bought at or near peak for prices, and even then, there's no value to actually lose unless the home must be sold. Considering that these would be recent home purchases, fairly new homeowners would be least likely to sell so soon after buying, especially considering the highly competitive market they likely fought through to get a home in the first place. Even if it should occur, any temporary value loss should be erased over time, but until then, some of these folks may end up being counted among those homeowners considered to be "underwater".

According to Cotality, the highest concentrations of underwater homeowners are in Iowa and Louisiana, but there are a number of midwestern states and even places such as New York where the problem is quite persistent. On balance, odds favor that the pretty flat trend for underwater mortgages will continue in 2025, likely averaging around 940,000 million to 1.05 million properties, with little change from present levels.

Home Equity / Cash-out refinancing

Even with some markets showing softer home values compared to a year ago, the vast, vast majority of homeowners have deep or very deep equity stakes. That's true even a place like the San Antonio-New Braunfels, TX metro area, where values were 1.58% lower in the third quarter of 2024 compared to the same period last year. Even factoring for the near-term dip, home values in this market are still about 39% higher than they were four years ago and still more than 19% higher than just three years ago. Many smaller and mid-size metro areas are still seeing very strong price gains, too, with high-single-digit annual increases or better seen in places like Syracuse NY, Harrisonburg VA, Odessa TX or South Bend IN.

While typical homeowners may have a deep equity stake, borrowing that equity isn't all that attractive, largely due to high interest rates. Home equity lines of credit are typically priced at about two percentage points above the prime rate, putting HELOC pricing for typical borrowers at about 9.5%, still roughly equivalent to a 17-year high. Still, Federal Reserve data shows that from the third quarter of 2023 through the second quarter of 2024, new home equity lines of credit managed to increase 4.7%, about $17.693 billion in new borrowing.

While the short-term interest rates that influence HELOCs held firm at a high level over that entire period, long-term rates actually retreated a bit at times, increasing the appeal of fixed-rate home equity loans. Over the same four-quarter period, these installment-type second mortgages managed a 6.6% rise in activity, with $33.166 billion in new originations by homeowners.

With first mortgage rates likely to ease somewhat, it's certainly possible that some potential equity borrowers will turn to a cash-out refinance to access their equity stake. However, for homeowners with existing mortgage rates in the three percent and four percent range, this won't be an especially attractive or viable angle. With market-based interest rates and the Fed-following prime rate likely to be a bit lower again next year, there's a good chance that more homeowners will instead again turn to home equity lines and loans to tap equity.

Since we're reckoning for 2025, we think we'll see a 5% increase in originations of home equity lines of credit and perhaps a 7% increase in those of home equity loans. Rates still won't be all that attractive, but for most homeowners it will be more favorable to expose a relatively small dollar amount to them in a draw of home equity via a loan or line than it will be to take a new mortgage with both a higher loan balance and a higher interest rate.

At the same time, cash-out refinancing should see a little boost as mortgage rates improve, but even in an improved interest rate climate, they won't be low enough for most homeowners to want to replace what is likely an existing lower-rate loan with a new one at a higher rate.

Certainly, there can be situations where such an exchange will work. Borrowers with old loans that have very small existing balances could be one audience, but there likely aren't many homeowners that will fit this category. Perhaps the primary audience will be borrowers looking to tap equity to spruce up their homes in preparation for a sale in the next year or two. Yes, the new loan's interest rate will likely be higher than their existing loan, and yes, the loan balance will be higher, but restarting the amortization clock all over again does help ameliorate the impact of these to a degree... and, by comparison, taking out a home equity loan or line of credit instead still brings the potential for a higher monthly payment for the two mortgages combined.

In a short time-frame situation, the long-term effects of higher interest cost don't really come into consideration, as it's more about current cash flow as opposed to long-term costs. As an example...

A homeowner who took a 5.25% 30-year loan back in May 2022 for $300,000 would have a principal and interest payment of $1657, and by May 2025, will have a remaining loan balance of about $286,212.

A cash-out refinance with a $24,000 equity draw (loan balance $310,212) at 6.25% produces a monthly P&I payment of $1910, so this would be a $254/month increase.

Taking a home equity loan of $24,000 for 10 years at a rate of 8% brings a monthly payment of $291, so the cash-out refi would cost about $38 per month less than the equity loan (to make the payments roughly equivalent requires a home equity loan rate of about 4.875%).

This is only an example to show what's possible, of course, but it does at least suggest that some homeowners will look to do cash-out refinances this year. All that said, refinancing activity overall will remain quite muted -- rate and term refinances will likely be attractive only for recent (e.g. 2024 vintage) homebuyers, while cash-out refinances should pick up just a little for existing homeowners who don't have long-term plans to stay in their current home.

Freddie Mac noted back in August that in the first half of 2024, about 86% of conventional refinance originations were cash-out refinances. While this may sound like the old "house as an ATM" days, the reality is that it simply shows how few traditional rate-and-term refinances have been taking place as mortgage rates remain elevated. By Freddie's figures, the amount of equity tapped by cash-out refinancing in 2023 was $49 billion; during the first half of 2024 (latest data) it has been $25 billion, so about the same soft annual run rate this year as last. Freddie notes that "the volume [of all refinances] in the first half of 2024 ($147 billion) is the weakest since the first half of 1995."

Both 2023 and 2024 activity suffered from a surge in rates; in 2023, fixed-rate mortgages rose to nearly 8%, while the peak in 2024 was a lower-but-still-high 7.22%. Both years featured a similar low water mark for rates (6.09% in '23, 6.08% in '24) but the reality is that rates last year and this year were highly similar, and even look as though they will end 2024 in just about the same place they ended 2023.

While rates should spend at least some time closer to the 6% mark in 2025, there's little reason to expect a surge in cash-out refinancing, as the overall trend for rates is only expected to be somewhat improved compared to the last two years. When such downward dips in rates occur, we'd expect to see a pick up in both traditional and cash-out refinances, but overall we expect modest improvement in the recent trend at best.

HECMs / Reverse Mortgages

High interest rates in 2024 didn't only crush activity in forward mortgage markets, they also significantly curtailed action in reverse mortgage markets, too. When reverse mortgage rates were low in 2021 and 2022, many homeowners with existing HECMs refinanced, taking advantage of both higher property values (expanding the amount of equity they could access) and increased homeowner ages (same) all with the chance to meaningfully lower the amount of accrued interest these loans would accumulate, leaving more untapped equity available for the future.

Higher interest rates simply left no reason for most homeowners to bother to refinance their HECMs, but they also seemed to even damp originations for "traditional" uses, too. Endorsements for traditional HECMs fell from 33,963 in FY2023 to 26,501 in FY24, a 22% decline. As well, since these rates were both less favorable -- and homebuying conditions still very challenging -- even the use of an HECM to purchase a next home was impacted. The use of a HECM for a home purchase was only about 6% of HECM originations in FHA's most recent fiscal year.

Although interest rates for HECMs will eventually decline along with other market-based interest rates, they really haven't yet. Even when they do, even as much as a full-point decline will still leave fixed-rate HECM rates around the 7% mark, although monthly HECM ARMs rates may be somewhat more favorable. At least from an interest rate standpoint, there's little reason to expect a significant increase in HECM activity in 2025, although aging and retiring "baby booomers" and high home values should provide some demographic and market-oriented support.

At best, we might see a 3-5% or so increase in HECM endorsements in 2025. With rates high enough as to still discourage refinancing of HECMs, any growth will likely come from the "traditional" originations, although there may be a modest pickup in "HECM for purchase" activity.

Home prices

Statement on last year's Outlook: Pretty good. Last year at this time, we were among the few who believed that existing home prices would be well supported in 2024 despite still-slack home sales. At the time, we wrote "We think existing home prices will be very well supported again in 2024... It would not surprise us at all to see a new record high home price at the typical seasonal peak in June." As it turns out, that new peak actually came in May, then again in June. We expected that "existing home price increases probably run in the 2.5% - 3% range on average across markets," and while we won't know December price changes until after this Outlook is published, the average annual change over the first 11 months of 2024 is 4.59%, so existing home prices will outperform our expectation.

Existing home prices
Will 2025 be a repeat of 2024? There's a good possibility of it.

As we write this, there has been roughly a normal amount of seasonal home-price decline, as 32 of the top 50 metro areas saw median home prices decline (compared to the second quarter). A year ago, this was only 19 of 50 markets, and outside of two very distorted pandemic years (2020, 2021), price decline in 28 markets (56%) is more typical in each year's third quarter, with the fourth quarter of each year usually the annual cyclical valley for home prices. Falling mortgage rates into the end of the third quarter failed to ignite home sales, so sellers may have needed to be a little more flexible on pricing this year than has been the case in recent years,

As far as seasonality goes, from 2023's June peak of $413,800, median existing home prices declined to $378,600 by January of 2024, an 8.5% decline. This year, the peak for home values was $426,900 in June, and if the same decline should occur, the bottom for median home sale prices would occur in January at $390,613 -- still about 3.2% higher that a year ago, so hardly a bargain.

After pressing as high as 7.22% in May 2024, mortgage rates dropped to almost 6% before rebounding to nearly 7% late in the fall. At this writing, they are nearly equivalent to those seen at this time in 2023, and will likely close 2024 and start 2025 in a similar position. From present levels, they are likely to decline at least somewhat into the late winter/early spring homebuying season, lifting demand, and this makes it likely that home prices will reignite again.

The re-engagement of potential homebuyers who moved to the sidelines during the fall spike in mortgage rates will be added to those folks who have remained in the market. The supply of homes available to buy has improved somewhat, but not yet enough to offset a measurable increase in demand, so there will still be too few homes available to meet demand, and this in turn supports higher prices.

The lack of homes available to buy -- caused by a combination of factors, and not just the so-called "lock-in effect" of homeowners reluctant to give up mortgages with rock-bottom rates -- isn't likely to change dramatically, but it may start to improve a little. It's worth considering that a homeowner who wants to sell and move may not actually be able to qualify for a mortgage large enough to buy another home, given that today's higher-priced homes need to be financed with today's higher mortgage rates.

Some longer-dated homeowners with a deep equity stake may be able to make a move with less effect on their new monthly payment, and some folks who have needed more or different space may be more motivated to sell this year after struggling through 2024... but probably only some.

We think existing home prices will be very well supported again in 2025, as the housing market again only takes small steps toward normalizing. It would not surprise us at all to again see a new record high home price at the typical seasonal peak in late spring, but overall for the year, existing home price increases probably run in the 3% - 4% range on average across markets.

New home prices
Improved supply chains, lower lumber prices and worker shortages that healed after pandemic distortions allowed prices of new homes to come down from their record high levels of a couple of years ago, and builders have been using price cuts and financing incentives to help keep homes selling. Of late, though, prices of newly constructed homes seem to be on the rise again, and emerging issues that include tariffs and immigration practices threaten to press them higher still next year.

The median price of a new home sold has become quite competitive with median existing home prices, and in November 2024, the median price of a new home sold was $402,600 versus $406,100 for an existing home. Where prices of existing homes have been sticky and stubbornly high, those for new homes dropped from October 2022's peak of $460,300 to as low as November 2024's $402,600, but have mostly rebounded from their downward trend, seasonality notwithstanding. Still, new home prices are about 6% below two years ago.

The new construction market doesn't suffer from the same kind of supply issues as does the existing home market. In fact, the supply of new homes available to buy is very good at the moment, averaging about 8 months of supply at the typical sales pace in 2024. As well, the number of actual new homes available to buy continues to rise; November 2024's 490,000 (annualized) units is the highest number since December 2007, the most in 17 years.

While this is good news for potential homebuyers, it doesn't mean that new homes are a substitute for a better-balanced existing home market. It also seems likely that prices for new homes aren't very likely to decline much more from present levels, either. Prior to the pandemic, median new home prices routinely ran in the $320,000 - $340,000 range; the last time we saw this moderate price level was more than four years ago, in August 2020.

For homebuilders, the price easing in materials from post-pandemic supply-chain improvement is likely mostly complete. That said, many home building materials are sourced from outside the U.S., and potential tariffs will likely increase the costs of goods needed to construct and complete new homes. That will likely raise costs. Builders have struggled with a dearth of skilled labor for some time, and expected changes to immigration procedures could affect the supply of both skilled and unskilled laborers needed to keep construction happening. This too could help create upward pressure on new home prices in 2025 and slow the pace of new construction, too.

As noted above, about a third of home builders have been using price cuts running in the 5% to 6% range to help bolster sales, but they have also been using other deal-sweeteners such as financing subsidies, too. With the basic costs for building homes likely to be higher next year, these will be important in keeping price increases damped and sales humming.

While there will be typical fluctuations in seasonal demand that influence new home prices, we think that the overall trend for them for 2025 will be somewhat firmer compared to where we are at the moment, but when comparing the average for all of 2025 against all of 2024, we may end up seeing a slight increase of perhaps 2% - 3% for the year.

Existing home sales

Statement on last year's Outlook: We overshot the mark by a bit. We expected as much as a 5% increase in sales of existing homes, but mortgage rates failed to behave as expected and record-high home prices damped sales, We expected a 4.35 million rate, and pending December's sales, it looks like perhaps 4.05 million annualized is all we'll see.

Plenty of demand, lack of supply, adverse financing conditions. This has been the state of the existing housing market for the last few years now, but will there be any improvement in 2025?

That's not to say that conditions won't be changing; they will. Over time, mortgage rates are more likely to trend closer to recent lows than recent highs, and that should help at least a few more folks engage the market. In recent years, though, demand hasn't been the problem. A lack of homes to buy has been at least as much of a damper on sales as have been high mortgage rates. That said, this too is changing; according to the National Association of Realtors, inventory-to-sales ratios have improved in late 2024, and by this measure supplies of homes are about as high as they have been since pre-pandemic times at about five-year highs, if still well below optimal levels.

More homes for sale is helpful, but only if the right mix of homes comes onto the market. For example, adding more move-up and luxury inventory into a market that really needs more available starter or trade-down homes would see inventory levels rise but no commensurate rise in sales.

Home sellers have been reluctant to put their homes on the market for a number of reasons, but improving interest rates may help this situation a bit, too. As we noted above, it may be more than the so-called "lock-in" effect that's kept folks from selling homes. It may very well be that existing homeowners can't qualify for a new, likely larger mortgage amount with an interest rate that is double what they are current paying. Can't qualify, can't move; it's as simple as that. A smaller gap between their existing loan's interest rate and a new one will be less daunting, and having a large equity stake to swing into a new property could mean an equal or perhaps smaller loan amount that is exposed to it as well.

At the same time, there are always some sellers who are motivated to move -- folks relocating for work, moving for family reasons, retiring from high-cost markets to lower cost ones, etc.. Arguably, with markets in turmoil last year, there were somewhat fewer of these folks than might be typical, and improved opportunities this year -- or simply the passage of time -- may see somewhat more of them put homes into the market this coming year. This may be enough to help stabilize or actually lift the actual number of homes for sale a little more yet, or at least help then remain around pre-pandemic levels for longer.

Somewhat improved demand and somewhat improved supply amid somewhat improved financing conditions seems likely to produce somewhat improved existing home sales for 2025. The peak annualized monthly run rate for existing home sales in 2024 was 4.38 million, while the bottom through November was 3.83 million, and for the year it looks like about 4.05 million will be the final tally. Existing home sales will likely build on this to some degree in 2025, but probably only modestly so. We think that existing home sales should be able to increase by 3% - 4% in 2025, probably ending up with a 4.19 million annualized rate when all is said and done.

New home sales

Statement on last year's Outlook: Overshot the mark, at least so far. A hurricane-stalled improvement in sales has (through November) only seen about a 2.4% increase in sales of newly-constructed homes, where we called for perhaps an 8% increase over 2023 levels. While there is still one monthly sales report yet to be included, it looks like the final tally for 2024 will fall short of our expectations, unless it's a real blockbuster.

Despite a less-strong-than-expected showing for new home sales in 2024, the prospects for gains remain solid. Even with some expected improvement in supply in the existing home market, conditions there will likely remain fairly tight. In turn, this helps create demand for new construction, at least in markets where both new construction and existing homes are a viable option for homebuyers.

While by no means a straight upward line on a graph, sales of new homes remain in a long recovery that has now stretched for nearly 14 years. Way back in February 2011, in the midst of the housing collapse and Great Recession, new home sales bottomed at just 270,000 annualized units sold, In general, sales trended routinely upward until June 2019 (729K), followed by a pandemic-fueled boom to a 1.031 million pace by October 2020, then a drop to a June 2022 bust of just a 519,000 annual clip. Since then, sales have generally been in an uptrend, averaging a 601,000 rate for the remainder of 2022, then posting a 665,000 level for all of 2023. Through eleven months of 2024, it's a 681,000 annual rate.

With positive demand dynamics in place, the prospects for lower interest rates in the market and other expected changes have buoyed builder sentiment. In turn, builders have been putting up more homes; following the same time periods as above, single-family housing starts ran at a monthly average annual rate of 869,000 units to close 2022, kicked up to a 948,000 annualized rate for 2023, and despite headwinds, have been averaging a 1.006 million pace so far in 2024. If home builders didn't think that buyers were going to come, it's a reasonable certainty that they wouldn't be putting up homes at such a fast pace.

At present, the latest look at new home sales for all of 2024 (through November) pegs the current run rate at 681,000. With typical ups and downs, mortgage rates for all of 2023 averaged 6.81%; with just one week to go in 2024, the same average is 6.72%, so rates are nearly identical, but perhaps enough to help sales to improve a bit in 2024 year compared to 2023.

An offset to higher home costs has come from builders themselves. Financing incentives (subsidizing interest rates temporarily or even permanently) and/or combined with price cuts have helped keep lift sales, and should these be accompanied by marginally-lower mortgage rates in 2025, the prospects for a pickup in sales are improved. The lack of inventory in the existing home market may have eased somewhat, but there are at least some potential borrowers who will consider a newly-constructed home as an option to meet their housing needs, even if it may not be a perfect fit.

Much new development takes place outside or on the fringes of major metropolitan areas; admittedly, that's less of a concern when someone can work remotely. But with companies at least continuing to revert work-from-home policies back to return-to-office ones, the prospect of longer commutes to work from a new home may again become a consideration in a buying decision. Still, and even with drawbacks, the chance to actually buy a home may be compelling for buyers who have been shut out of the existing home market for as long as a few years now.

A combination of lower mortgage rates and continued builder incentives should serve to help lift sales of new homes in 2025. Seasonal and monthly swings notwithstanding, buyer demand should pick up from present annualized levels. With this as a backdrop, sales of new homes in 2025 will probably post a gain of 4% to 5% over 2024, putting them at a total of 708,000 to 716,000 for the year.

Additional thoughts

Every year has some overarching things -- "known unknowns" as it were -- that can change a lot of things in positive or negative ways. There's just no way to know which way they might break.

Certainly, ongoing wars in Ukraine and the middle east may have unpredictable outcomes and there's no telling what may come. The U.S. economy is doing okay, but economies across the globe aren't in quite as good shape, and the U.S. isn't insulated from economic or financial troubles elsewhere. Changes in trade policies or relationships with allies and foes may produce unpredictable economic or political outcomes in 2025.

With that in consideration, here are couple of thoughts on other items for 2025:

The incoming administration seems very likely to work to extend the tax provisions of the 2017 Tax Cuts and Jobs Act, so the mortgage interest deduction will likely remain as is for now. One housing-related tax item that could use some updating perhaps is the capital gains tax on the sale of primary residences.

In 1997 when the current $250,000 (individual) and $500,000 (joint) exclusions were put in place, these figures were pretty generous. By way of reference, the conforming loan limit for 1997 was $214,600; it is now nearly four times that amount. Like many provisions in the tax code, these figures were never indexed for inflation; if they were, the $250,000 single exclusion would now be $489,744 and the $500,000 joint version, $979,488 -- nearly double where they currently stand.

Given the large rise in home values in recent years, longer-tenured homeowners could face large tax bills should they sell their homes. Scaling up the tax break a bit -- or doing so for a limited time window -- might help some folks consider putting their homes on the market in order to capture the tax break. At a time when inventories of homes to buy are still thin, elevating sales prices, this might be a way to add some additional supply to the existing home market in the near term.

As long as we're looking at taxes, perhaps a change to help recent homebuyers might also be a consideration. The deductibility of premiums paid for Private Mortgage Insurance has had an on-again, off-again history, but always seems to be popular when it's on. Perhaps again making it deductible along with mortgage interest (for those who itemize their returns) might be a fairly painless way for the government to again help lower the cost of homeownership, if fractionally.

To that end, and given skyrocketing premium costs, perhaps some consideration might be given tax credits or deductions for premiums paid for homeowner's hazard insurance. Even a partial write off would help homeowners, and could come with an income-limit threshold to allay concerns about favoring wealthy homeowners.

Back in 2017, State and Local Tax (SALT) deductions were capped at $10,000 under the TCJA, and again, never indexed for inflation. This was put in place at the same time the doubling of the standard deduction (which is indexed for inflation) was enacted. If the provisions of the TCJA are extended or made permanent, we wonder if there may be some adjustment or indexing of the SALT limits. Any changes would only likely help homeowners in high-tax states, but these encompass many housing markets on the coasts and elsewhere. American taxpayers already back high-limit mortgages for borrowers in these markets.

As always, and despite known and yet-unknown challenges, we hope for the best in the coming year. Here's wishing you a healthy, prosperous and peaceful 2025.