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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 58 January 2025 J O U R N A L "lock-in effect" of mortgage rates and housing affordability continuing to be major obstacles for countless Ameri- cans. The GSE provides five forecasts for the housing market in 2025 below, along with our housing and economic outlook. According to the report, the econo- my looks to be well-positioned to close out 2024: Although the labor market is gradually cooling, consumer spending has remained strong, unemployment is still low, and job creation is now oc- curring at a solid rate according to de- mographic trends. The GSE predicts no significant drop in the 10-year Treasury rate in 2025, which will keep mortgage rates high and home sales "muted," especially if inf lation measures are still stickier than markets anticipated earlier in 2024. Fannie Mae revealed that uncer- tainty surrounds this dynamic, includ- ing whether strong labor productivity can support GDP in the upcoming year, whether inf lation will soften, and if not, whether interest rates will stay struc- turally higher for an extended period. Although they have not yet includ- ed any specific policy changes in their predictions as consumers await further information, changes to immigration, trade, fiscal, and regulatory policies could all have a significant impact on our prognosis for economic growth, inf lation, interest rates, and housing. Key Findings From the Fannie Mae Forecast: • There will probably be periods of volatility, but average mortgage rates will decrease slightly while staying above 6%. • In 2025, economists predict that the average mortgage rate will continue to be higher than 6%. Sticky inf lation and a seemingly stable labor environment have dampened the environmental expectations for further interest rate decreases. The GSE anticipates that mortgage rates will stay high compared to pre-pandemic levels and only marginally decline to about 6% by the end of 2025 unless economic growth begins to slow considerably. Bond markets have increased 10-year yields in response to election outcomes and better data. However, it's anticipated that periods of volatility in mortgage rates in the upcoming year due to persistent uncertainty regarding the robustness of economic growth, the stickiness of inf lation, and potential policy adjustments. • The 10-year Treasury yield has f luctuated significantly during the last six months in response to both positive and negative inf lation and economic statistics. In addition to navigating uncertainty around present and future economic development, financial markets are attempting to ascertain the final "neutral" rate for the fed funds rate. We anticipate periods of financial market volatility when bond mar- kets revalue interest rate expecta- tions as additional data is released and information about possible policy adjustments emerges. • According to their baseline forecast, core inflation will continue to de- cline, and economic growth and em- ployment increases will slow slightly in the upcoming year, but it won't achieve the Fed's target until 2026. However, the possibility of sustained consumer spending resilience and higher-than-expected productivity growth poses a significant upside risk to their economic outlook. Signifi- cant tariffs or a noticeable slowdown in immigration, however, indicate both an upside risk to inflation measures and a downward risk to economic development. Interest rates may be impacted by both positive and downside risks associated with potential changes to tax and regula- tory policies. Current Home Sales Will Contin- ue to Hover Around 30-year Lows Fannie Mae predicts that existing home sales will reach 4.25 million in 2025, which is an estimated 4.8% more than the 4.06 million we anticipate in 2024 but still 20.3% lower than in 2019. They anticipate a small increase in current home sales in the upcoming year due to the larger number of homes on the market. At the end of November, there were 1.37 million properties for sale, up 19.1% over the same period last year, according to the National Association of Realtors. However, it's expected that the lock-in effect and limited affordability circumstances will remain the main factors restricting the recovery of existing home sales in 2025, especially as it's forecast that mortgage rates will remain above 6%. Since the middle of the 1980s, affordability circumstances have remained at their most restricted levels. Furthermore, even if mortgage rates ap- proach 6%, we anticipate that the lock- in effect will continue to be significant. Some 14% of Fannie Mae single-family loans with a 30-year fixed rate mort- gage had a rate higher than 6% at the end of September, while 58% had a rate lower than 4%. As predicted, the lock-in impact will eventually diminish, but economists think the process will be gradual given the downward slope in the fraction of single-family loans with a rate below 4% and the higher slope in the share with a rate larger than 6%. Only a small and transient increase in mortgage applications and home sales took place in September, even while interest rates momentarily dropped to about 6%. Because of this sluggish reaction, we think that mortgage rates close to 6% are probably not going to be enough to generate enough new demand or to motivate enough homeowners to sell, both of which are necessary to "defrost" the housing market. However, as was previously mentioned, the number of properties for sale varies significantly by region, and some areas are probably going to have higher sales in 2025 than in 2024. Strong homebuilding in recent years tends to be associated with relatively free markets. According to Realtor.com, inventory levels are close to or higher than pre-pandemic norms in many Sun