First American Data & Analytics recently hosted its 2025 Housing Market Outlook webinar, to explore the economic trends that will affect the mortgage and real estate markets this year. First American Deputy Chief Economist Odeta Kushi provided insightful analysis and commentary on the health of the U.S. economy, the supply and demand dynamics of the housing sector, affordability challenges, regional market variations and what’s in store for the housing market as it continues its recovery in 2025 and beyond.
Macroeconomics Headwinds
Overall, core Consumer Price Index (CPI) inflation has proven to be stickier than expected, hovering at about 3.3% over the last few months, which is above the stated 2% target from the Federal Reserve (Fed). But there are disinflationary pressures that can continue to drag overall inflation lower in early 2025. Persistent inflation, a strong jobs report at the end of 2024 and a resilient economy have reduced the Fed’s urgency to cut interest rates—the Fed anticipates only two rate cuts by the end of 2025.
While inflation in the goods sector is at or below historical norms, high shelter costs continue to elevate overall inflation. Meanwhile, the U.S. labor market remains strong but is gradually cooling—unemployment rose from 3.5% in early 2023 to the current 4%, and job growth is slowing. Although layoffs remain low, hiring has weakened, and job openings have declined, with unemployment projected to reach 4.3% in 2025 according to FOMC projections.
Consumer spending continues to drive economic growth, but as pandemic-era savings dwindle, more consumers are turning to credit alongside rising credit card debt and delinquency rates. The combination of a slowdown in hiring and higher debt levels suggest that some are struggling, which could cause headwinds in 2025.
Mortgage Rates Expected to Remain Elevated
According to most industry estimates, mortgage rates are expected to remain above 6% in 2025. Recent forecasts from Fannie Mae, the MBA and Wells Fargo suggest that mortgage rates will end the year around 6.5% on average. Though mortgage rates topped 7% this January, some stability has emerged. The narrowing spread between the 30-year fixed mortgage rate and the 10-year Treasury yield is signaling a potential easing in mortgage rate pressures.
Demographic Trends Driving Demand
Millennials, now the largest generation, are driving housing demand as they age into homeownership. Unlike previous generations, they are buying later in life due to delayed milestones like marriage and children. Many in the younger Gen Z cohort entered the market early for the demographic due to pandemic-era conditions including the work-from-home trends that led many to buy and historically low interest rates that made it attractive for them to do so. While affordability constraints impact both generations, trends indicate they are delaying—not abandoning—the American Dream of homeownership.
Baby boomers are aging in place longer which is contributing to inventory constraints. However, as Boomers reach their 80s, downsizing will gradually increase housing supply, creating a slow but steady shift in the market. This “silver glacier” effect will gain momentum in the late 2020s and early 2030s, impacting long-term housing dynamics.
As baby boomers age out of homeownership, however, many of their homes will require updates to attract younger buyers. First American conducted an analysis to determine what percentage of homes owned by homeowners who are over 60 are considered adequate or inadequate. Inadequate is defined as a home that has issues such as a lack of electricity, hot water or insufficient heating. The analysis showed that approximately 1 million U.S. homes owned by people over the age of 60 are considered inadequate. That still leaves about 32 million single-family homes that are considered adequate—meaning no significant issues—but many still need renovation and remodeling to be attractive to younger buyers. A significant number are in very sought-after, prime locations. According to the analysis, approximately 11 million are in top 25 U.S. metropolitan areas, with 1.5 million in New York and almost 1 million in Los Angeles. With many buyers still waiting for affordability to improve, the gradual turnover of these homes could help ease housing shortages in some markets, potentially even leading to surpluses over the next decade.
Supply is Improving, But Still Has a Way to Go
The U.S. has faced a persistent housing shortage for more than a decade with new construction failing to keep pace with household growth. Currently, only 10 homes are built per 1,000 households, far below what’s needed to meet demand. The shortage is estimated at 3 million units with only 1.4 million units currently under construction—covering only half the deficit. With positive household formation, construction must accelerate to address both the current backlog and future demand. From a sales perspective, the new home market is expected to outperform the existing-home market due to builders’ ability to offer incentives—such as mortgage rate buydowns— and the chronic shortage of existing homes for sale.
Another significant issue exacerbating the housing supply shortage is the high number of homeowners "rate locked" in low-interest mortgages—83% of mortgaged homes have a rate below 6%, with an average rate of 4.2%, much lower than the current 7%. This rate-lock effect is expected to persist through 2025, limiting existing home inventory. Though inventory increased in 2024—housing supply increased in 34 of the top 50 markets on a year-over-year basis—supply is still below historical norms. Currently, about 135 in every 10,000 homes are for sale, compared to the historical norm of 250.
Affordability Improving, But Still Far Below Previous Norms
Active inventory, which includes homes sitting on the market longer, is contributing to price declines and improved affordability in certain markets like Tampa. According to the First American Real House Price Index, Tampa is experiencing a year-over-year price decline, with similar trends occurring across the Sunbelt region where price moderation and rising for-sale inventory are helping to ease affordability issues. Despite these price moderations, many markets still have substantial equity cushions due to the earlier price gains. Overall, First American expects nominal house price gains in 2025 to be in line with historical averages in the low 3% range. Given the expectation that income growth will slow to about 4%, and mortgage rates will be in the range of 6.5% by the end of the year, there could be slight increases in affordability by the end of 2025 compared to the end of 2024.
To learn about these highlights in more detail, you can watch the webinar and download the full presentation by clicking on the button below.
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