2025 Housing Market Outlook: Affordability and “Lock-In Effect” Keep the Market in a Freeze

According to the latest forecast from Fannie Mae’s Economic and Strategic Research (ESR) Group, the housing market in 2025 is expected to remain sluggish, with affordability challenges and the so-called “lock-in effect” continuing to dampen activity (The lock-in effect refers to people’s unwillingness to sell because they have a much lower rate on their existing mortgage, originated when rates were lower, than they could get on a new mortgage). While the broader U.S. economy is anticipated to grow at an above-trend pace through 2026, the housing market faces a different trajectory.

Here are Fannie Mae’s top five predictions for the housing market in 2025:

1. Mortgage Rates Will Remain Elevated: While average mortgage rates are expected to decline slightly, they will still hover above 6 percent. Periodic volatility may create temporary opportunities for homebuyers, but elevated rates will continue to weigh on overall housing activity.
2. Existing Home Sales Stuck Near Historic Lows: Existing home sales will remain constrained due to affordability pressures and the lock-in effect, where current homeowners with low mortgage rates are reluctant to sell. Regional differences will be significant, with markets in the Sun Belt outperforming supply-constrained areas like the Northeast.
3. New Home Sales Provide a Silver Lining: The new construction market will remain a bright spot, particularly in areas where homebuilders can continue building. Builders targeting first-time homebuyers in regions with robust construction activity, such as the Sun Belt, are expected to see relatively strong demand.
4. Slower Home Price Growth: After years of rapid appreciation, national home price growth will decelerate. While prices are expected to stay positive overall, they will grow at a more manageable pace, easing some affordability concerns over time.
5. Multifamily Market in a Holding Pattern: Multifamily housing will likely see little movement, as developers and investors navigate ongoing uncertainties in the market.

Read more: Home value PICO home condition score

Challenges and Opportunities

Mark Palim, Fannie Mae’s Senior Vice President and Chief Economist, noted that 2025 will look much like 2024 from an affordability perspective. Mortgage rates will remain a hurdle, and the housing supply will stay below pre-pandemic levels. However, Palim also highlighted some positive developments, including wage growth outpacing home price growth for the first time in over a decade, which could gradually improve affordability.

“The homebuying experience will continue to vary widely by location,” Palim said. “For instance, we’re seeing robust construction activity in the Sun Belt, where builders are focused on affordable options for first-time buyers. Meanwhile, in the Northeast, supply constraints will likely keep housing activity subdued.”

Heightened mortgage rate volatility could also create brief windows of opportunity for buyers to lock in lower rates, potentially leading to short-term boosts in market activity.

Read more: Chances of Fannie and Freddie being privatized

Why Will Mortgage Rates Remain High?

Mortgage rates are expected to remain high going into 2025 due to a combination of factors, primarily tied to Treasury yields and broader economic conditions. Rates for 10-year and 30-year Treasury bonds, which heavily influence mortgage rates, are likely to stay elevated because of persistent inflation concerns and the Federal Reserve’s cautious approach to lowering interest rates. Even as inflation has eased somewhat, the Fed’s focus on maintaining price stability means that significant rate cuts are unlikely in the short term.

Furthermore, following the 2024 election, market reactions suggest uncertainty about future fiscal policies, which can keep yields high. For example, the current spread between Treasury yields and mortgage rates remains historically wide, reflecting lender caution amidst economic unpredictability. Some analysts expect that, even with potential Fed cuts in 2025, the 10-year Treasury yield will stay above 4%, ensuring mortgage rates remain elevated.

Market optimism tied to the new administration’s policies—such as infrastructure spending or tax code changes—could push yields higher as investors anticipate greater economic activity and inflationary pressures. These factors suggest sustained mortgage rate levels through 2025

Read more: Will there be a commercial real estate recovery in 2025?

Looking Ahead

The ESR Group’s forecast highlights the challenges of navigating the housing market in 2025 but also points to gradual signs of improvement in affordability. For real estate professionals, understanding regional dynamics and keeping an eye on mortgage rate trends will be key to navigating this complex market.

For more insights, visit Fannie Mae’s Economic and Strategic Research site to explore the full December 2024 Economic Outlook, including forecasts on the broader economy, housing, and multifamily markets.

Franklin Carroll

Franklin Carroll is Kukun's VP of Modelling and Analytics; After finishing his studies at the University of Chicago, he worked at Fannie Mae where he helped build Collateral Underwriter, roll out the Value Verify initiative, and specialized in collateral related and credit related policy.

Published December 24, 2024