Painting a portrait of what the housing market will look like a year in the future is a tall order. However, knowing what variables are likely to shape the big picture can be exceedingly helpful.
First American Financial Corp. Chief Economist Mark Fleming sat down with Dodd Frank Update during the Mortgage Bankers Association’s 2025 annual conference in Las Vegas to discuss what real estate finance professionals should keep an eye on during the months ahead.
The Fed’s decision to drop short-term interest rates in September and October came after months of political pressure. To provide context for these decisions, Fleming explained that interest rate cuts can be broadly described as falling into one of two categories – good cuts and bad cuts – depending on the economic conditions reflected by such moves.
Whereas “good” rate cuts imply inflation is under control, the top U.S. economists have described the latest 25-basis-point reductions approved by the Fed as a reaction to weakening in the labor market and inflation uncertainty, making it an example of the latter type of cut.
Meanwhile, as rates and housing affordability have gotten a significant amount of attention over the past year, with major implications for the refinance market, the purchase market has been slow to change. Fleming attributed this to the fact that the purchase market tends to be fueled more by lifestyle events rather than rates.
“The purchase market isn’t rate-driven anymore. I think the purchase market is lifestyle-event driven at this point,” Fleming said. “Getting married, having kids, changing jobs, getting divorced, aging out of homeownership – they’ve always been there, regardless of what rates are doing. It’s just that, since 1981, essentially, rates have always been coming down so our market has been built on life events and turnover driven by mortgage rates.”
Recent rate cuts are not necessarily going to lead to declines in the 10-year Treasury rate or the 30-year fixed mortgage rate, he explained.
“Most industry forecasts now suggest that mortgage rates will be somewhere between 6 percent and 6.5 percent by the end of this year and, actually, in a very similar range next year,” Fleming said. “So even if the Fed is loosening monetary policy, the expectation at least is that the mortgage rate will not significantly adjust down. Even if it were to adjust down below 6 percent, I don’t believe that that would be a significant enough change in the mortgage rate to truly change the dynamics of the housing market.”
Many homeowners are locked into rates below 4 percent and would need to see rates dip considerably from their current level to feel incentivized to consider moving or refinancing, he said. Such actions would only make sense to accommodate major life events in most scenarios.
Affordability will continue to be the biggest barrier to entry into the housing market for the foreseeable future. Strategic rate changes implemented to stave off a recession in the wake of the pandemic are largely to blame for that fact, Fleming said, coupled with a low supply of available housing inventory.
Fortunately for the industry, Fleming said he has noticed signs of improvement in that category, albeit slowly.
“Affordability is improving as incomes grow faster than house prices and modest house price declines in some markets, but this will take a long time,” he explained. “We basically reduced affordability by so much when we raised rates so dramatically over the last couple of years that it will take years to regain the levels of affordability that we had during the pandemic.”
Fleming compared the dynamic between house prices and household income to the anecdotal tale of “The Tortoise and the Hare.”
“Affordability is going to be the tortoise in this scenario, slowly just chugging away, eating up at the gains in house prices with income slowly growing,” he said. “The hare would be what rates do to affordability. A 1 percent or 2 percent change in interest rates can significantly change affordability. If you get too much of a change in house-buying power because of a mortgage rate change, and the market doesn’t adjust quickly enough in terms of the supply dynamic, then it immediately gets reflected in prices.”
Housing inventory remains constrained, hovering at between four months and 4.5 months of supply, Fleming noted, adding that 5.5 months and six months’ worth of supply tends to be considered a balanced market.
Referring back to his point about lifestyle factors, he said homeowners with relatively low-rate mortgages are gradually listing properties as life circumstances change.
“These are people who probably have mortgages well below the prevailing rate,” he said. “But life happens, and so they’re listing their homes for sale. And as time goes by, the rate-lock in effect we’ve had for four or five years now and have been waiting and waiting to end, will start to wind down as those people decide it’s time to move regardless of rates.”
In short, there is no quick and easy fix for the so-called “affordability crisis” in the housing market, as much as potential homebuyers and industry professionals hope there could be such a thing. Instead, Fleming said, there will likely be a slow and steady recalibration as the lock-in effect slowly unwinds itself over time.