My 2025 real estate and mortgage forecast will take a look at inflation, the labor markets, and the Federal Reserve to help us better understand what we can expect in the coming year.
These 3 factors portend for potentially lower mortgage rates over the course of this year…while home values will continue to rise.
Right now, housing supply is still relatively low, and demand is growing – and that means home price appreciation.
On the mortgage side, will interest rates finally come back? Let’s take a look at the factors that will most impact real estate and mortgages in 2025…
Inflation
The single biggest driver of bond yields AND mortgage rates is inflation.
Mortgage rates are essentially determined by inflation, which erodes the buying power of the fixed return that a mortgage holder receives. When inflation rises, lenders demand a higher interest rate to offset the more rapid erosion of that buying power.
And that’s what we’ve been seeing over the last 3 years.
When the Fed hikes rates, they are trying to slow the economy and curb inflation. If successful in cooling inflation, mortgage rates will decline.
When they lower rates, the Fed is trying to spur economic growth with more availability to less expensive capital.
As I’ve mentioned previously, the Federal Reserve botched their management of inflation in 2020 and 2021 and were forced to make severe changes to offset the damage. This brought market instability and increased mortgage rates.
Inflation has remained stubbornly high over the last year, but news on the horizon looks promising.
As a matter of fact, I believe that the current data (the Personal Consumption Index or PCE) is overstating inflation by about .4%
Once this is worked out, we should see the inflation numbers come down, leading the Fed to want to reduce the Federal Funds rate.
One of the largest components in the PCE is “shelter costs”, or rents. You can see in the chart below that these costs have been dropping regularly, and this trend will show up in the months ahead.
The trend in inflation is working in the borrower’s favor, and it means the Fed’s going to have to look at cutting the Federal Funds rate even more in 2025.
You can find out more on inflation, The Federal Reserve, and mortgage rates here…
It looks like core inflation might be in the low 2% range by the middle of this year, which bodes well for lower mortgage rates.
One wild card, however, will be how the bond market views the ever-expanding federal deficit and debt. The level of government spending isn’t giving great comfort to those who regularly purchase government bonds, so this is something everyone needs to be watching. Increased debt loads could move bond yields higher, which will not help mortgage rates.
The Labor Market
There has been much discussion about the labor markets and employment data this year.
Estimates by the Federal Reserve Bank of Philadelphia indicate that the employment changes from March through June 2024 were significantly different compared with preliminary state estimates from the Bureau of Labor Statistics’ (BLS).
This year the BLS stated that the US economy added nearly 2.5 million new jobs…but the Quarterly Census of Employment and Wages (QCEW) done by the Philadelphia Fed showed growth of only 1.25 million jobs.
That’s a 50% discrepancy! One might even conclude that the BLS numbers were potentially inflated due to election posturing.
Nevertheless, here’s what’ currently happening regarding employment:
As you can see, unemployment is up nearly 1% over the last 18 months and is continuing to rise.
Secondly, the duration of an average unemployment stay (based on how long a laid-off employee receives unemployment benefits) is up 21% over the last 7 months and is continuing to rise:
This means that finding a job once you’ve been laid off is getting tougher, signaling a tightening labor market.
Next, there are few jobs available right now, per the Bureau of Labor Statistics:
There are 30% fewer job openings since January of 2023. So…the unemployment rate is moving higher, job openings are dropping, and people are collecting unemployment for a longer amount of time.
My thinking here is that the labor market isn’t in as good of shape as many in Washington think. This may bode well for mortgage rates if these trends continue
The Federal Reserve
For starters, the Federal Reserve’s “dual mandate” is to keep prices stable AND achieve maximum employment.
It does this by controlling the money supply, and raising or lowering interest rates when the economy is slowing down or growing too fast.
We’ve seen this in the last year, when the Fed reduced its Federal Funds rate by 100 basis points, as inflation started to wane.
When the Fed cut interest rates in September, many hoped it would kick-start the frozen housing market. Mortgage rates track the 10-year US Treasury yield, which was expected to fall in anticipation of further rate cuts. However, recent economic data has looked stronger than expected, which has shifted the market’s expectations, sending bond yields higher.
Today, most analysts believe that the Fed will continue to cut its lending rate…and that it might well spur mortgage rates to follow this time around.
Per the diagram below, the majority of Fed members believe that the Federal Funds rate (currently at 4.375%) will be lowered to 3.875% sometime in 2025.
However, with the labor markets numbers being potentially over inflated, many believe that many more Fed voting members will change their tune if/when unemployment numbers start to rise.
And as shown earlier, there’s a very good chance that the unemployment rate might very well rise in the months ahead, forcing the Fed to cut their interbank lending rate even further.
Most Fed members believe that unemployment will stay between 4.2% and 4.3% – with a few thinking it could go as high as 4.5%:
But what if inflation moves higher? What if the recent corporate layoffs mentioned previously start to show more in those labor reports?
My guess is that the Fed will lower rates to stave off higher inflation…which should be good for mortgage rates.
Mortgage Rate Forecast
As mentioned previously, the 30-year mortgage rate generally follows the path of the 10-year treasury bond. Today, the 10-year yield is hovering right around 4.5%.
But how does that relate to mortgage rates?
Well, the historical spread between the 30-year fixed mortgage rate and the 10-year treasury is between 1.6% and 2% – or averaging around 1.8%. Meaning, that if the 10-year yield is at 4%, mortgage rates should be right around 5.8% (4% yield plus 1.8% spread).
However, today’s market is skewed…mostly due to the 2020/2021 event and it’s resulting hangover. Take a look:
As you can see, today’s spread is over 2.5% – far outside of historical norms. And, it’s declining, which is good news.
It September of 2024, the 10-year yield touched 3.6% (and it spurred a fair amount of refinance activity for about 3 weeks, before they rose to 4% in early October):
So, what if the current spread went from 2.5% to just 2.25% AND the 10-year treasury dropped to 3.5%? Rates could look like this:
And this absolutely could happen this year. Based on inflation and employment data – coupled with continued spread reduction, mortgage rates in the high 5% range is quite realistic.
As mentioned previously, the wild-card will be how the bond market views government spending a debt.
Real Estate Forecast
Let’s turn our attention to real estate and what we can expect in 2025.
The forecast for real estate centers once again on supply and demand, and the supply continues to be tight…more on that later.
First, though, let’s take a look at what’s happening with the home buying demographic. As you can see in the chart below, there are plenty of opportunities for buyers in the Millennial age category…and the Gen Z group isn’t too far behind:
We will see great homeowner growth in both Gen Z AND Millennials over the next few years.
At the same time, will new home construction keep up to fill this demand? Let’s take a look.
First, active listings have fallen significantly since pre-Covid. Listings are down 21% since 2018 AND the population has grown by over 12M people. Yes, listings are up year-over-year (which is good news, indeed), but nowhere near what’s required.
Household formations (or the amount of NEW households being created through cohabitation or marriage) tells the story of how many new homes are needed every year. Interestingly, the statistic has remained very constant at right around 1.9M per year:
On the other hand, new homes being built is remaining constant at 1.3M per year:
As you can see, there are far more households being formed than builders putting up new homes. This is why the real estate market has been so strong of late and why you we seeing prices increase due to a lack of inventory. It’s going to be a similar story for 2025 and more.
So, what does this mean?
Well, it means that home prices will continue to appreciate…and that will accelerate even faster when mortgage rates improve.
I see appreciation in 2025 at over 4% for the year AND appreciation over the next 5 years to be over 30%. This means real estate is a good buy right now and will help create great wealth in the future.
In Conclusion
Here’s what I think will happen in 2025:
It’s looking like 2025 will be an interesting year…and one that will have solid wreath-building opportunities available. Do reach out to me to discuss how you might be able to move forward in 2025 to take advantage of this changing market!
If it’s easier, you can set an appointment with me here…
This Market Update and similar such communications are for informational purposes only and are based on publicly available information. These materials are general communications, which are not impartial, and are provided solely for discussion purposes, and not in connection with any product or service offering. The opinions and views expressed in this Market Update are as of the date of this communication and are subject to change. Any forward-looking views and statements contained in this Market Update are based on current estimates or expectations of future events or results. Actual results may differ materially from those described in this Market Update. The views expressed in this communication should not be attributed to Guild Mortgage Company as a whole and may not be reflected in the strategies and products offered by Guild Mortgage Company.
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