In 2024, the U.S. housing market faced challenges due to high mortgage rates, limited inventory, and affordability issues. Mortgage rates remained elevated, averaging around 7%, deterring both buyers and sellers. This led to a stagnation in home sales, with projections indicating the lowest levels since 1995. Despite these obstacles, home prices continued to rise, driven by persistent demand and a shortage of available homes.
Notably, pending home sales increased by 2.2% in November, marking the fourth consecutive month of gains and reaching the highest level since February 2023. As 2025 approaches, the market is expected to remain tight, with affordability challenges persisting for many prospective buyers.
Fed Rate Cuts vs. Mortgage Rates
In late 2024, the Federal Reserve cut its benchmark interest rate three times, reducing it from 5.25%-5.50% to 4.25%-4.50%. These moves aimed to combat slowing inflation and a softening labor market, sparking opportunities for borrowers and influencing the housing market. However, the actual impact on mortgage rates was less straightforward.
The largest cut, a 0.50% reduction in September, briefly lowered mortgage rates from nearly 8% to 6.2%, prompting a wave of refinancing and buyer interest. Yet by November, despite another 0.25% cut, mortgage rates rebounded to 6.72% due to volatile bond markets and persistent demand. December’s final 0.25% cut had minimal additional impact, leaving 30-year fixed mortgage rates hovering around 7% by year-end.
Why didn’t mortgage rates fall further? The answer lies in how they’re determined. While Fed rate cuts directly affect short-term loans like credit cards and adjustable-rate mortgages, fixed mortgage rates are driven by the bond market, specifically the 10-year Treasury yield. When investors expect economic uncertainty, bond yields—and mortgage rates—drop. However, strong housing demand or inflation fears can keep rates elevated despite Fed actions.
Even with over a 1% reduction in the federal funds rate in 2024, mortgage rates barely moved due to these broader forces. Understanding this distinction helps borrowers navigate the market, showing that Fed rate cuts are only part of the equation in determining mortgage affordability.
NAR Real Estate Forecast Summit: The Year Ahead
On December 12, NAR (National Association of REALTORS®) held a virtual economic and real estate summit that provided a year-end review of 2024 and outlook on the real estate market and the economy for 2025.
NAR Chief Economist Dr. Lawrence Yun and a panel of experts provided valuable insights into the market’s trajectory for 2025, emphasizing both challenges and opportunities. Mortgage rates are expected to hover around 6.5%, with slight decreases potentially bringing them below this level by the end of the year. The Federal Reserve is anticipated to implement rate cuts next year, fostering optimism for a gradual improvement in affordability.
Mortgage origination volumes are projected to grow by 20% in 2025, rebounding from historically low levels. Home sales are also expected to rise, with a 5% increase in existing home sales and a 10% jump in new home sales. National home prices may see modest growth of 1.5%, down from 4% this year, while multifamily rent growth is expected to remain flat.
Affordability remains a key issue, particularly for first-time buyers. Builders and sellers are leveraging incentives, like rate buy-downs, to attract buyers. Inventory shortages persist, especially for entry-level homes, but regions like Florida and Austin are seeing improvement due to favorable policies. Regulatory reforms, such as easing zoning for medium-density housing, are seen as critical to addressing supply challenges in markets like Virginia and California.
Experts remain cautiously optimistic for 2025, citing inventory growth, job market stability, and policy-driven changes as positive indicators. However, concerns about affordability, seasonal disruptions, and structural supply-demand imbalances underscore the need for strategic actions across the industry.
While the real estate market faces headwinds, 2025 is shaping up to be a year of recovery and growth, particularly in home sales and mortgage activity.
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