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Sales of existing homes are expected to remain near 30-year lows next year as elevated mortgage rates keep many would-be sellers feeling locked in to their existing loans, Fannie Mae economists said in their final forecast of the year.
But “significant regional variation” in listings means many Sun Belt states — and parts of the Mountain West and Pacific Northwest — should see a brisker pace of home sales than the rest of the nation, forecasters at the mortgage giant said Monday.
Slowing home price appreciation means Americans could see their wages go up faster than home prices next year for the first time since 2011, “helping to start a gradual improvement in homebuyer affordability conditions,” Fannie Mae economists said in commentary accompanying their latest forecast.
Mark Palim
“From an affordability perspective, we think 2025 will look a lot like 2024, with mortgage rates above 6 percent, home price growth easing from recent highs but staying positive, and supply remaining below pre-pandemic levels,” Fannie Mae Chief Economist Mark Palim said in a statement.
Ups and downs in mortgage rates “may present opportunities for would-be homebuyers to take advantage of temporary lows, and we may see stretches where housing activity is boosted by lower rates,” Palim said.
Home sales projected to bottom this year
Source: Fannie Mae Housing Forecast, December 2024.
After a dramatic 16 percent drop in 2023 as mortgage rates hit post-pandemic highs, home sales failed to rebound this year.
While new home sales are now forecast to post 4.1 percent gains this year, to 693,000, sales of existing homes look like they’ll slip by about 1 percent, to 4.058 million.
At 4.752 million, this year’s pace of sales is the lowest in three decades and is only expected to pick up by 5.3 percent next year and 9.2 percent in 2026.
“Our outlook for existing home sales was revised upward modestly in 2024 and 2025, but notably downward in 2026,” Fannie Mae forecasters said of changes from last month’s forecast.
Recent easing in mortgage rates and a pickup in homebuyer mortgage demand drove the near-term upward revisions. But the longer-term outlook for 2026 “has been revised downward due to a reassessment of the persistence of the lock-in effect, which we expect to continue to suppress home sales for the foreseeable future,” Fannie Mae economists said.
New home sales are expected to remain a bright spot next year, with 755,000 projected sales representing 8.8 percent growth.
“In the face of elevated mortgage rates, homebuilders continue to show a willingness to offer incentives like interest rate buydowns to move their inventories of new homes available for sale and to change the products offered to be smaller, more affordable homes,” Fannie Mae economists said.
The price premium between new and existing homes has come down from 28 percent in the years before the pandemic to about 4 percent this year — in part because builders are shifting to smaller homes.
The median square footage of new homes has dropped from a peak of 2,519 square feet in Q1 2015 to 2,158 square feet in Q3 2024, Fannie Mae economists noted.
After this month’s upward revisions, sales of existing homes are expected to increase by 4.8 percent in 2025, to 4.251 million.
But thanks to strong homebuilding and rising inventories, sales in Sun Belt states like Florida and Texas are likely to outpace the national average. Parts of the Mountain West region and Pacific Northwest also have inventory levels near or above pre-pandemic norms, Fannie Mae economists said, citing data from Realtor.com.
“In general, we expect that inventory levels will continue their gradual rise nationwide,” Fannie Mae economists said, although inventories in the Midwest and Northeast continue to lag significantly from pre-pandemic levels.
Wages may rise faster than home prices
Source: Fannie Mae Housing Forecast, December 2024.
With home price appreciation expected to continue to decelerate to 3.6 percent by Q4 2025, Fannie Mae economists project nominal wage growth will exceed home price growth next year for the first time in more than a decade.
“Underneath that, there may well be some markets that post very small negative (price) declines,” Palim told Inman. “The dynamics we’re seeing in the housing market are a substantial regional variation because of the relative importance of new homes in different markets.”
Although Fannie Mae economists only update their home price appreciation forecasts in January, April, July and October, the December forecast included projections for 2026 that were not made public in October.
They show Fannie Mae economists expect home price appreciation to continue to fall every quarter of 2026, dropping to 1.7 percent by Q4.
“Affordability is going to continue to be an issue, given how unaffordable the housing market is, even if you have some positive movement,” Palim said.
Mortgage rates expected to ease
Source: Fannie Mae Housing Forecast, December 2024; Mortgage Bankers Association forecast, November.
Fannie Mae’s mortgage rate forecast is largely unchanged from November, with rates expected to drop into the low sixes next year and still average 6 percent during the second half of 2026.
“Sticky inflation and an apparent stabilization in job market gains have lowered market expectations for future interest rate cuts,” Fannie Mae economists said. “Unless economic growth starts to slow significantly, we expect mortgage rates to remain elevated relative to pre-pandemic levels, moving only slightly downward to around 6 percent by the end of 2025.”
Home prices support mortgage volume
Source: Fannie Mae Housing Forecast, December 2024.
With home prices still climbing, 2025 growth in purchase mortgage originations is expected to outstrip sales, growing by 12 percent to $1.4 trillion.
Fannie Mae economists cut their forecast for 2026 purchase mortgage originations by $54 billion from November to $1.6 trillion, due to the more conservative outlook for sales.
Refinancing volumes are now projected at $360 billion in 2024, $529 billion in 2025, and $724 billion in 2026, after $30 billion in upgrades from the November forecast.
Housing starts yet to bottom
Source: Fannie Mae Housing Forecast, December 2024.
A 6.9 percent drop in single-family housing starts in October prompted Fannie Mae economists to downgrade their near-term forecast for new home construction, and the more conservative outlook for 2026 sales also prompted a downward revision from November.
The latest forecast envisions single-family housing starts bottoming out at 995,000 next year, before rebounding by 2 percent in 2026, to 1.012 million.
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