As we do every year we like to start out by giving a recap of what happened in the prior year and give our long-term forecasts for the coming year. Recapping is easy, but forecasting is difficult especially in a volatile market with a ton of external factors at play.
As it pertains to mortgage rates and housing last year we spent a lot of time talking about inflation, unemployment figures, the 10 Year Treasury note, and home appreciation. In 2024, we saw home appreciation close out at 4.5% year over year, the 10 Year Treasury Note floated between 3.6% and 4.7%. Mortgage rates stayed between the upper 5%’s (for a short period of time) to the mid 7%’s at various stretches during the year.
Unemployment went from 3.7% to start the year and increased all the way up to 4.2% to close our 2024. The Fed’s favorite measure of inflation (Core PCE) was 2.8% as of the end of November and keep in mind the Fed’s target has always been 2.0%. All in all, 2024 was very similar to 2023 but the biggest impact to housing was that the Fed started their rate cutting cycle. Very rarely does the Fed start a cutting cycle and then change course later so we can say with a high level of confidence that the worst is behind with regards to rates.
That begs the question, “What will happen now?” Overall, we don’t see 2025 as a year where major changes occur, we don’t see mortgage rates plummeting, we don’t see a housing crash, we don’t see the Fed making major changes to policy. However, we do see improvement in almost all areas of housing and mortgage during 2025 and the trend should be for the positive. We see 2025 setting the stage for 2026, and as other external factors play out (i.e. new administration, Fannie/Freddie leaving government control, etc…) we should have a better sense towards the end of the year what 2026 will look like.
As we forecast 2025, I would expect to see unemployment rise from 4.2% to around 4.5% or 4.6%. This number could ultimately be higher depending on some of the new administration’s policies not to mention that the unemployment data has been under fire for almost a year. There are many economists that feel the current employment data is not accurate so if this comes to a head you could see some wild revisions to 2024’s numbers.
We would expect to see Core PCE around 2.1% to 2.2% by the end of the year, which is almost exactly where the Fed wants to see inflation. The Fed released their annual “dot plot,” in which all voting members of the Fed place their predictions on the Fed Funds rate. 1 member thinks there will be no cuts, 3 members think there will be 0.25% in cuts, 10 members see 0.5% in cuts, 3 think project 0.75% in cuts, 1 thinks 1.0% in cuts and 1 final member sees 1.25% in cuts during 2025. We tend to disagree with the majority and our projection would be 1.0% in total rate cuts during 2025. We feel that as unemployment data gets released and the new administration takes over, there will be pressure on the Fed to act so we see them cutting a total of 1% during 2025.
We can see mortgage rates getting down to the upper 5%’s or low 6%’s during 2025 and while this will be a welcomed sign, it’s far from a massive drop. As mortgage rates go down, affordability increases, and despite what you might read online, there is still more demand for housing than inventory. If we look at inventory compared to 2018, there is 21% less inventory than we saw in 2018, however, there are an additional 12 million consumers now compared to 2018. We feel that appreciation will be close to 4.1% and very similar to appreciation in 2024.
As with any forecast, things can change over time. Unforeseen events can occur, markets can react irrationally to news, and forecasting a market as large as housing 12 months in the future is near impossible. However, at this point in time, we believe in our forecasts, we believe in housing, we believe that mortgage rates will be better this year than last year and we believe that real estate is still one of the greatest ways to build wealth in America. We understand that everyone’s situation is unique and we’re more than happy to answer any questions, have a private consultation of options and build out a strategic plan so you can win in real estate this year!
