2025 Real Estate Market Forecast Shows Moderate Improvement Ahead
The U.S. economy is expected to fare well in 2025, according to economists from across the spectrum, with few headwinds anticipated. However, forecasters are predicting only small gains in the real estate market, as interest rates remain stubbornly in +6% territory and inventory continues to show only modest improvement.
Investment firms Goldman Sachs and Charles Schwab are particularly optimistic about the potential for growth and expansion in the economy in the coming year. Goldman Sachs Research (GSR) predicts GDP growth will reach 2.5% for 2025. “The US economy is in a good place,” said David Mericle, chief U.S. economist in GSR. “Recession fears have diminished, inflation is trending back toward 2%, and the labor market has rebalanced but remains strong.”
Internationally, Charles Schwab research envisions consistent 3% growth across the board in 2025, despite trade war concerns emanating from the threat of increased tariffs.
“Not one of the top 45 economies in the world are expected to be in recession next year,” said Jeffrey Kleintop, Managing Director, Chief Global Investment Strategist in a Dec. 2 release. “Most are expected to grow faster in 2025, including Europe, Japan, Canada, and the U.K., according to the latest outlook from the Organization for Economic Cooperation and Development (OECD), International Monetary Fund (IMF), and the consensus of economist forecasts tracked by Bloomberg.”
While all of this should point to an improving housing market, there are still plenty of headwinds for consumers, including the elevated cost of living in general, as well as a tight housing market that has kept prices from moderating despite dwindling sales over the past year. That is not expected to change heading into 2025.
Recent data indicators, including resilient employment and cooling inflation, point to a stronger economic foundation, especially if interest rates moderate in 2025.
The Consumer Price Index rose 2.6% through October, up from 2.4% in the September data, but moderate compared to the peak of 9.1%. Employment has been surprisingly resilient with an unexpected jump in jobs numbers in September after a sluggish summer. And although jobs bottomed out in October due to two hurricanes and several significant labor strikes, the economy quickly rebounded by adding a healthy 227,000 jobs in November.
The continued strength of the economy has allayed some consumer fears, opening the door to the potential for increasing home sales in 2025.
Consumer Confidence
Although inflation has diminished consistently through 2024, persistent elevated prices from two years of high inflation continued to contribute to consumer frustration. As job growth lagged over the summer, consumers became increasingly pessimistic, but according to The Conference Board, that tide is beginning to turn.
“Consumer confidence continued to improve in November and reached the top of the range that has prevailed over the past two years,” said Dana M. Peterson, Chief Economist at The Conference Board. “November’s increase was driven by more positive consumer assessments of the present situation, particularly regarding the labor market. Compared to October, consumers were also substantially more optimistic about future job availability, which reached its highest level in almost three years.”
The question foremost in the minds of real estate professionals is will all of this good news result in a stronger real estate market in 2025.
Interest rates hold the key to 2025 housing market
On Sept. 18, Federal Reserve Chair Jerome Powell announced a widely expected .5% point rate cut, saying it reflected the agency’s “growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%.”
More significantly, Powell noted that FOMC participants at the meeting prepared individual assessments of an appropriate path for the federal funds rate, determining that if the economy evolves as expected, the appropriate level of the federal funds rate would be 4.4% at the end of this year and 3.4% at the end of 2025.
The FOMC followed up with a 0.25% rate cut in November. However, during the December meeting, policymakers signaled a more restrained outlook for future rate cuts, reflecting concerns about inflation and broader economic conditions. The updated “dot plot” now indicates expectations for only two quarter-point cuts in 2025, marking a slower pace of monetary easing than previously anticipated.
Despite the Fed’s actions, mortgage rates have remained elevated, hovering around 6.5% through the final quarter of the year. This persistence in higher rates has further tempered expectations for the housing market.
In its Nov. 26 forecast report, Freddie Mac noted that while the U.S. economy remained resilient with strong Q3 growth, unexpected volatility in mortgage rates has weighed on housing and mortgage activity.
“As we get into 2025, we anticipate that rates will gradually decline throughout the year,” the GSE reported. “The expected decline in mortgage rates in 2025 should loosen some of the rate lock-in effect for existing homeowners, offering more inventory in the market.”
However, in its November Spotlight Report, Freddie Mac noted that the housing market continues to be plagued by a housing shortfall, which has persisted for years.
“Housing affordability remains one of the top economic issues facing American households,” the GSE noted. “Both homeowners and renters have seen the cost of housing increase faster than other consumer prices, putting a significant strain on household budgets. As we have documented in several previous research notes, the root cause of decreased housing affordability is the fact that housing supply has not increased enough to match demand. Inadequate housing supply leads homeowners and renters to bid up the sale price and rent of available housing, which puts a squeeze on affordability.”
Fannie Mae has also revised its home sales projections for 2025, saying they are expected to rise by only 4% next year. According to the November 2024 commentary from the Fannie Mae (FNMA/OTCQB) Economic and Strategic Research (ESR) Group. the downward revision to the existing home sales outlook, which was previously forecast to rise 11% in 2025, is the result of significant upward movement in mortgage rates.
“Whereas previously the ESR Group had expected mortgage rates to dip below 6% in early 2025, the revised forecast now shows mortgage rates ending 2025 at 6.3% and remaining above 6% through 2026,” the report noted. “The ESR Group does expect a significant improvement in existing home sales of around 17% in its inaugural 2026 forecast, as affordability conditions improve, the lock-in effect weakens, and pent-up demand to move materializes. Furthermore, the ESR Group continues to expect new home sales to improve on already-robust levels in both 2025 and 2026, as homebuilders continue to offer buyers incentives to move existing inventories.”
A changing market
For real estate agents, the volatility of the 2024 real estate market was compounded by the National Association of Realtors (NAR) settlement, which brought significant changes to real estate practices. While these changes led many part-time agents to exit the profession, full-time professionals have quickly adapted and are ready to move forward under the new system.
In the mortgage arena, lenders have encouraged their loan officers to become far more consultative with their clients to ensure borrowers have the tools and knowledge to make the best decisions about the range of home they can afford and to be prepared to increase their downpayment to make their monthly payments more affordable.
Affordability and availability are going to be the keynote for a real estate comeback in communities across the U.S. in 2025 due to high interest rates and the persistent escalation of home prices. Migration trends may shift from states impacted by environmental disasters or housing markets that are overpriced to areas that boast affordability, availability and with fewer downsides such as high taxes and climate impact.
Real estate professionals should stay vigilant and adapt to these evolving trends within their regions, positioning themselves to better navigate market challenges and seize emerging opportunities in 2025 and beyond.
Tags: business, economy, home buying, real estate