Economic trends impacting the housing industry heading into 2025

As we approach 2025, the housing industry is poised for significant shifts driven by evolving economic trends. One of the most critical factors influencing the market is the trajectory of interest rates. In September, the Federal Reserve has cut its fed funds interest rate by 50 basis points to a new target range of 4.75% to 5%. This marks the first rate cut since the pandemic, signaling a potential easing of borrowing costs for both consumers and businesses. Lower interest rates are expected to stimulate economic activity, potentially leading to increased home sales and a more dynamic housing market. However, the pace and impact of these changes remain uncertain as the Fed navigates the delicate balance between fostering growth and controlling inflation. What does this mean for home sales over the next year, and when could it be more affordable to buy a house? The Nationwide economists discussed these questions and more in a recent episode of Economic Insights by Nationwide.

Listen to the Economic Insights by Nationwide podcast: How lower rates could boost housing.

Key economic trends affecting the housing industry

Recent trends in mortgage rates

Mortgage rates have seen significant fluctuations over the past few months, influenced by varying economic factors. At the start of 2024, 30-year fixed mortgage rates were relatively high due to inflation concerns and the Federal Reserve’s aggressive rate hikes aimed at curbing inflation. However, as inflationary pressures began to ease and economic data suggested a slowing economy, these mortgage rates started to decline, reaching their lowest levels since May 2023. The anticipation of further rate cuts by the Federal Reserve has put additional downward pressure on mortgage rates. This trend has created a more favorable environment for potential homebuyers, potentially boosting home sales as financing becomes more affordable.

Current state of home sales and housing supply

In many ways the current state of home sales and housing supply looks very similar to what we saw in 2023. In fact, the average monthly total home sales through June 2024 was very close to the average for all of 2023. This tells the story of a paralyzed market that is beholden to the shifts that we see in mortgage rates from month to month. We saw this with the existing home sales numbers over the first half of the year, which rose sharply in January and February as those mortgage rates came down from the highs in the fourth quarter of last year. Once rates came back up, existing home sales fell off sharply for the next couple of months through June, resulting in some of the weakest sales levels since the housing market collapsed in the early 2000s. The National Association of Realtors Housing Affordability index is at the lowest level since the mid-1980s – signaling that it could be the worst time to buy a home in over 30 years.

Housing supply trends: Limited by homeowners with lower existing rates

Most homeowners right now are locked into mortgage rates that are well below the current market levels. According to FHFA data from the first quarter of this year, 76% of outstanding mortgage loans were at a 5% rate or lower, with many below 4%. With rates currently at 6-7%, homeowners with lower rates are not incentivized to move – resulting in near-record lows for existing home inventory for much of the past two years. This lack of inventory limits the options for potential buyers and drives prices up further, worsening the affordability problem that we’re seeing across the U.S.

New home sales: Subtle impact on the overall market

New home sales have not declined nearly as much from their pandemic peaks as existing homes have, which have seen some of the lowest sales activity of the last 10 years. The lack of inventory of existing homes has been somewhat of a boon for new home sales. And builders have stepped up new construction and are offering incentives to help bring down the high interest rates for buyers.

New home construction is a much smaller component of the overall housing market, offsetting only a small portion of the supply constraints for the existing supply of homes. The total level of overall housing transactions is much lower than normal, further impacted by affordability and availability. However, mortgage rates are now at their lowest levels since May 2023 and the existing home market is starting to grow its inventory.

Home construction costs and limitations

The overall market has been chronically underbuilt as far back as the 2008 housing market collapse and is still challenged today by constraints in construction. The cost of home construction has been on a steady rise, driven by several interrelated factors. The price of essential building materials, such as lumber and steel, has surged due to global supply chain disruptions and persistent demand. These logistical challenges have been exacerbated by labor shortages, leading to delays and increased expenses for builders. Additionally, fluctuating fuel costs have impacted transportation fees, further inflating construction budgets.

One interesting dynamic is that while there is a low ceiling on existing home sales, the supply of new homes for sale is actually quite healthy. The current level of new home listings has only been surpassed in one period on record, which is just prior to the 2008 housing market crash. According to the National Association of Home Builders (NAHB) survey in August, 33% of builders said they had to cut prices to sell homes, which is up from 29% in June.

Until recently, builders have consistently maintained a solid pace through this high mortgage rate period, seemingly in an effort to capitalize on a historically-low supply of existing home inventory – which seems to have paid off. Now, with the supply in a good spot and buyers still facing high prices and interest rates – which is something that builders noted in their NAHB survey response – builders seem increasingly hesitant to put more resources into further increasing the supply of new homes.  The market would benefit from a greater influx of supply which could bring historically-high prices down. An increase of existing home inventory will drive up inventory, and lower interest rates could help make that happen.

Labor Costs

The construction industry has been facing a chronic labor shortage for several years now, with the problem only intensifying in recent times. As baby boomers continue to retire, there is a limited influx of young workers entering the field to fill the gap. This has resulted in increased competition for skilled labor and higher wages, driving up overall construction costs.

Furthermore, the pandemic has also had a significant impact on the availability of construction workers. Many were forced to leave their jobs due to safety concerns or lack of work opportunities during lockdowns, while others faced challenges in obtaining necessary materials and permits for projects. This has led to further delays and increased costs.

Overall, addressing labor shortages and finding ways to increase the available workforce in the construction industry will be crucial in keeping home construction costs down and meeting demand for new housing. It may also play a key role in helping to alleviate supply constraints and make housing more affordable for potential buyers.

Affordable housing

Affordable housing plays a critical role in the broader economic context, serving as a foundation for community stability and growth. It enables individuals and families to access safe and secure living environments, which in turn fosters workforce development and mobility. When housing costs consume a disproportionate amount of household income, it leads to financial strain, limiting residents’ ability to invest in other areas of the economy, such as education and healthcare. Additionally, a lack of affordable housing can exacerbate economic inequality and contribute to homelessness.

House prices have climbed since the pandemic, 40 to 50% versus pre-covid levels. At the same time, mortgage rates have been at the highest level since 2000 and 2001, and this combination of those very high prices and obviously very high rates in the market have pushed mortgage payments way beyond what many current renters can afford.

Looking ahead to 2025 with market conditions and the presidential election

As we look ahead to 2025, the factors we just reviewed will continue to impact the housing industry. One major unknown is the upcoming presidential election, which has historically had an effect on market conditions. Changes in political leadership can bring new policies and regulations that can affect interest rates, taxes, and other economic factors that influence the housing market. It is important for those in the industry to stay informed about these developments and be prepared to adapt to any changes that may come.

Both presidential candidates have signaled commitments to revitalize the housing supply through policies aimed at increasing home construction. These efforts, primarily focused on increasing the construction of starter homes, could help alleviate market prices thereby providing more families with opportunities to become homeowners.

The housing supply problem could benefit from a federal solution. However, such a solution should be complemented with a local-level understanding of market needs to ensure a comprehensive approach to the issue.

In addition, technology and innovation will continue to shape the housing industry in the coming years. From smart homes to virtual reality tours, advancements in technology are changing how people buy and sell homes.

Check out these additional resources

As with any market, it’s important to stay informed and to help your clients understand market conditions. Stay up-to-date with timely data and commentary from our Nationwide economics team on financial markets, consumer activity, inflation and more. You can also subscribe to our weekly Economic Insights by Nationwide podcast.

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