Housing market outlook: Muted sales, positive economic impact

• Unfortunately for those who might be in the market for a home, we do not expect mortgage rates to drop significantly any time soon, given our view that the economy is strong, and the Fed is likely on hold.
• We expect home prices to continue to appreciate in 2025, which can drive more spending on home renovations and power personal consumption.
• We anticipate that the wealth effect from rising home prices will be an overall positive for broader equity performance in 2025, even if home sales are muted.

We expect housing to remain a positive contributor to the U.S. economy in 2025.

Home sales activity remains muted thanks to “stickiness” in both home prices and mortgage rates. The outlook for the U.S. home price appreciation is dependent on a variety of factors and, of course, subject to regional differences. All real estate is local, as the saying goes.

Since last fall, the average new 30-year conventional mortgage rate has risen to about 7% and is expected to remain elevated.¹

Coming into 2025, we expected longer-term interest rates to be firm. So far, that’s been the case, as the U.S. 10-year Treasury bond has been rangebound around 4.50%.² We believe that rates are likely rising from a combination of higher growth expectations and worsening federal deficits that may require additional new Treasury issuance.³ (Read more about U.S. deficit dynamics.)

Despite tighter financing conditions, home prices continue to rise, boosting overall consumption.

The Case-Shiller U.S. National Home Price Index registered gains in almost every month of 2024, averaging a monthly gain of 0.3%.⁴ According to a 2017 study, a $1 increase in home values increased consumer spending by about $0.05.⁵ With U.S. home values rising by an aggregate of approximately $3.3 trillion in the first nine months of 2024, this implies that the effect of rising home values boosted the consumption of U.S. homeowners by $165 billion.⁶ We believe this boost to consumption will continue in 2025. Currently, market pricing implies 5% home price appreciation in 2025, a level which we feel is fair.⁷ If home prices do appreciate by that much in 2025, it is our view that the wealth effect could induce another $120 billion of consumer spending in 2025.

High mortgage rates have made the purchase of a home less affordable for first-time buyers.

Based on the current median home price, 30-year mortgage rates and assuming a 20% down payment, the expected monthly mortgage payment for a first-time homebuyer would be about $2200 (not including insurance and taxes).⁸ This commitment would represent roughly 30% of the income of the median U.S. household, one of the highest levels in the past 25 years (Figure 2).⁹

Due to the significantly higher rates of new 30-year mortgages compared to existing ones, we believe that current homeowners are less likely to consider moving.

We feel that many existing homeowners may have purchased their properties or refinanced their mortgage during periods of low rates that existed from 2008 to 2022, resulting in an effective mortgage interest rate of 4.03% despite current rates oscillating around 7%. Additionally, the current mortgage rate exceeds the average rate paid on new mortgages since 1998 (Figure 3).¹⁰ For many existing homeowners, selling their existing home and moving to a new home might mean settling for a less desirable house compared to what they could afford if mortgage rates were lower. With more existing homeowners seemingly locked into their current properties at the lower mortgage rates, the inventory of existing homes for sale has been low (Figure 4).

While inventories of existing homes are relatively low, new single-family homes available for sale are approaching pre-Global Financial Crisis highs.

Homebuilders have generally been well-disciplined regarding supply, but two years of lower-than-trend home sales have brought new home inventory to the highest levels since the 2008 housing crisis (Figure 5). Similarly, the supply of new homes built ‘on spec’ is at its highest level since 2008.¹¹

For investors who may feel shut out of the housing market, we prefer investments in equity markets and fixed income as alternatives.

Solid U.S. growth, healthy consumer balance sheets, strong corporate profitability, and the possibility of deregulation and tax cuts underpin our positive view of risk assets, as detailed in our 2025 Investment Directions. While we expect muted home sales in 2025, we anticipate that the wealth effect from rising home prices will drive more spending on home renovations and personal consumption. That has the potential to continue to drive a virtuous cycle, where higher consumer spending powers positive returns in stocks.

While the housing market may feel out of reach for many first-time buyers, investing in a diversified basket of stocks has become more accessible.

To learn more about ETFs, explore our ETF and investment education guides.