Persistently Elevated Rates and Ongoing Inflation Keep Property Costs Sky-High
Similar to numerous voices in the real estate sphere, I've had my share of predictions regarding mortgage rates, inflation, and their impact on housing. As we kick off a new year, it's natural to consider where interest rates might head in 2025, why, and what consequences that would have on the housing market.
Housing represents a substantial portion of the American economy, accounting for roughly 18% of the Gross Domestic Product (GDP). This figure includes construction of single-family homes and multifamily buildings, as well as the associated services and economic activity generated by the housing sector. Changes in one segment of the housing market can ripple effects throughout other sectors. Alterations in interest rates impact the cost of borrowing, resulting in shifts in demand.
Various economists, such as those from Redfin, believe that the average rate on a 30-year mortgage will hover near 6.8% in the upcoming year. This projection is based on expectations that Trump's proposed tax cuts will boost the U.S. deficit and his tariff plan could fuel inflation, pushing mortgage rates upward.
This prediction seems to be the prevailing opinion on the web, with Realtor.com projecting that rates will actually drop to 6.30% by the end of this year. However, according to its 2025 housing forecast, published earlier this month, Realtor.com now anticipates rates to conclude the year around 6.70% and average 6.30% in 2025.
The new Trump administration has proposed not only tariffs and taxes on imported goods but also sizable tax cuts. Both measures incline toward inflation. The tariffs generate extra revenue, but ultimately the consumer bears the cost. Tax cuts infuse more purchasing power into the economy, leading to increased spending and subsequently, higher inflation.
So, I find myself aligning with the majority, expecting higher rates and prices in the housing market. I am no longer hearing the same grim scenario I did toward the end of 2022. I had warned about the drying up of cheap money and the job losses that would follow, leading to desperate attempts by developers and builders to unload their projects. The housing market, I predicted, would be unable to produce much new housing in 2023 due to the sheer risk involved. As construction slowed down and those with money bought up land, properties, and projects, prices in cities would skyrocket during the recovery later in the year or in 2024.
However, a Reuters report suggests that housing production has surged and there's an oversupply of inventory. Homeowners remain content in their homes with 4% mortgage rates, while builders hesitate to start new projects. Combine this with higher interest rates, and it appears that prices in 2025 will remain elevated even with increased production. Even though state and local governments have eased regulations in the housing sector, this won't be enough to trigger a significant surge in production in 2025 to offset persistent high rates.
As we stand on the cusp of mid-decade in the 2020s, the housing market appears to be in a state of flux, featuring variable production, high interest rates, and numerous individuals biding their time, waiting for a catalyst to prompt them to make a move – either as buyers or builders. Regulatory barriers don't assist in alleviating this standstill. It's possible that the new Department of Government Efficiency might shake up the stagnant housing economy, but I'm skeptical. It seems likely that 2025 will bring more of the same – higher rates, higher prices, and fewer transitions from renting to buying – in the single-family housing market.
In light of these market conditions, it's crucial for businesses in the housing sector to adapt their strategies according to the anticipated rise in interest rates. The housing policy changes under the new administration could significantly impact their operations and profitability.
Given the forecasted increase in mortgage rates, it would be beneficial for businesses to explore alternative financing options or develop more affordable housing solutions to maintain their competitiveness in the market.
