A recent increase in mortgage rates is expected to continue to dampen existing home sales, keeping them near their lowest level since 1995.
That’s according to the Fannie Mae Economic and Strategic Research Group. In its January forecast, the ESR Group predicts that mortgage rates will close 2025 at 6.5%, and 2026 and 6.3%, up from the previous forecast of 6.2% and 6.0%. Home price appreciation is expected to slow to 3.5% in 2025, down from 5.8% in 2024, the ESR Group says. However, home price growth is expected to vary considerably by location because of regional differences in construction activity and the supply of homes for sale.
Economic data indicates a strong finish for 2024, particularly in the labor market, but the ESR Group says its outlook for economic growth has changed little. It reports that it is maintaining forecast for continued-but-slowing real GDP expansion in 2025. The ESR Group predicts year-total growth will be 2.2% in 2025, following expected growth of 2.5 % in 2024.
“While we still see signs of resilience in the labor market, the higher mortgage rates that are associated with a growing economy will likely continue the affordability challenges faced by many potential homebuyers,” says Mark Palim, Fannie Mae Senior Vice President and Chief Economist. “Due to the ongoing lock-in effect and affordability constraints, we currently expect another year of sluggish existing home sales. A silver lining for affordability is that we also anticipate income growth will outpace both home price and rent growth this year — and in many markets, new homes are now priced competitively with existing homes and are far more available. Otherwise, our expectation that home sales activity will remain limited, combined with the elevated rate environment, reaffirms our view that on a national level the 2025 housing market is shaping up to feel a lot like 2024.”
