Existing home sales are projected to remain under significant pressure in 2025, as rising mortgage rates and persistent inflation continue to dampen market activity, according to Fannie Mae's latest Economic and Strategic Research (ESR) Group commentary. The group's revised forecast now expects only a modest 4% growth in existing home sales next year, a sharp downgrade from its previous projection of an 11% increase. The pace of existing home sales in 2024 is expected to hit a nearly 30-year low, underscoring the challenging conditions in the housing market.
Challenges Ahead Despite Recent Sales Increase
While there was a slight uptick in sales in October, with a 2.9% increase compared to the same month in 2023—the first annual increase in over three years—the long-term outlook remains cautious. The National Association of Realtors (NAR) reported that the seasonally adjusted annual sales pace for October reached 3.96 million, a 3.4% rise from September. Despite this positive month-over-month change, Fannie Mae’s ESR Group sees ongoing headwinds ahead, primarily driven by higher mortgage rates and the persistent affordability challenges facing homebuyers.
Fannie Mae's Chief Economist Mark Palim noted in the commentary, "Long-run interest rates have moved upward over the past couple months following a string of continued strong economic data and disappointing inflation readings. To the extent that the recent run-up in rates has been driven by market expectations of stronger economic growth, we think this bodes well for the labor market outlook and home purchase demand." However, the ESR Group’s projections indicate that higher mortgage rates will continue to constrain the housing market, limiting overall sales growth.
Revised Mortgage Rate Outlook
The ESR Group had previously forecast mortgage rates to dip below 6% by early 2025, but that expectation has since been revised. The updated outlook now anticipates mortgage rates to finish 2025 at 6.3%, remaining above 6% throughout 2026. This elevated rate environment is expected to prolong affordability challenges for homebuyers, further constraining housing market activity.
"The higher mortgage rate environment is likely to strengthen the ongoing lock-in effect, where current homeowners are less motivated to sell due to the cost of moving up in rates," Palim explained. As a result, the ESR Group expects home inventories to remain subdued, continuing to weigh on existing home sales through 2025.
2026 Outlook: Potential for Recovery
Despite the expected challenges in the near term, Fannie Mae’s ESR Group is forecasting a stronger rebound in 2026. Existing home sales are projected to grow by 17% in 2026, driven by a variety of factors, including the willingness of homebuilders to offer buyer incentives. These incentives, such as price reductions or financial contributions toward closing costs, are expected to help mitigate the effects of higher borrowing costs, attracting buyers who may have otherwise stayed on the sidelines in the current market.
A key factor in this anticipated recovery is the expected easing of supply-side constraints. As homebuilders continue to respond to buyer demand, they will play an important role in supporting new construction activity, which should help improve housing market conditions. While affordability issues are expected to persist through the forecast period, the market's gradual shift toward more favorable conditions in the latter part of 2025 and into 2026 could provide much-needed relief for both buyers and sellers.
Economic Conditions and Future Market Trajectory
Fannie Mae’s updated economic forecast also includes a projection for 2026 GDP growth to align with the long-run trend of approximately 2.2%. Core inflation, which has remained elevated in the short term, is expected to reach the Federal Reserve's 2% target by the second quarter of 2026. However, the ESR Group anticipates less monetary policy easing in 2025 than initially expected, meaning the higher interest rate environment may persist for longer than previously projected.
The balance between competing factors, such as the pressures of high mortgage rates and the potential for pent-up demand, will be crucial in shaping the housing market’s trajectory in the coming years. "How these competing forces balance out is currently an open question, but for now we continue to expect affordability to remain the primary constraint on housing activity through our forecast horizon," Palim concluded.
Looking Ahead: A Complex Housing Market
The outlook for 2025 and beyond reflects a housing market caught between the persistence of affordability challenges and the potential for gradual recovery. While rising mortgage rates and inflationary pressures will likely keep existing home sales subdued, the ongoing efforts of homebuilders and the potential for economic stabilization may provide opportunities for growth in the future. Homebuyers and sellers alike will need to navigate these complexities carefully, keeping an eye on market fluctuations and adjusting their strategies accordingly.
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