2025 Housing and Economic Forecast

Just as forecasts rely on stability to be accurate, our economy relies on stability in certain areas in order to grow. While the U.S. economy remains strong in broad terms, there’s little doubt that many Americans do not feel they have been participating in that strength since COVID. A forward-looking economic situation where those who have been left behind remain left behind and those who have advanced lose confidence in their ability to plan for the future is among the worst of all possible economic worlds.

Policies regarding tariffs, immigration, and reduction of Federal spending that impact growth, safe commerce, and consumer confidence in critical industries are contributing to economic uncertainty. This forecast addresses potential points of uncertainty and economic friction and concludes with the housing forecast informed by these points.

It should be noted that we are in a rapidly changing environment and the conditions we face today could change and affect the outcomes we seek to forecast.

IMMIGRATION

While there can be no doubt that America has the right to protect its borders, wholesale deportations will dramatically reduce the workforce available in critical industries, especially housing and agriculture. Over 40% of farm labor in the U.S. is comprised of undocumented immigrants. We have recent experience, under both the George W. Bush and Obama administrations, that indicates what this could mean. It’s axiomatic that higher labor costs mean a higher cost of goods for the consumer. We also know that in a low-unemployment or natural rate employment environment, like the one we are in, there are some jobs that are notoriously difficult to fill with homegrown labor. Agriculture is chief among these.

During earlier crackdowns, fruit literally rotted on the ground in California orchards for lack of anyone to pick it up. This increases costs in two ways. First, what labor there is to be had, comes at a premium. Second, overall supply is reduced making the items more scarce and therefore more valuable. While these goods increased in price dramatically during COVID, the trend since has shown slower price growth than before COVID. While we cannot forecast the impact of losing nearly half the farm labor force, it will likely be inflationary and significant.

Between one quarter and one third of construction labor in the U.S. is done by undocumented immigrants. Removing a significant portion of this element of the workforce will be inflationary and will slow production. We’re still several million homes short of what we need in the U.S. In just the last four years the industry has, through herculean effort, closed the housing availability gap by millions of homes, in spite of admittedly onerous regulatory environments in almost all of the country. Over half the shortage we had in 2021 has been alleviated, by some estimates. This decimation of the construction labor force will decrease affordability and will slow production. We may close the gap more slowly or it may begin to worsen again, but prices will probably rise.

TARIFFS

Approximately 70% of the lumber used in U.S. construction comes from Canada and about 20% of construction hardware comes from Mexico. Although exact numbers are hard to nail down for homebuilding, China comprises over 16% of U.S. imports about 27% of total construction imports[i]. With these three nations being the primary early targets of tariffs, there’s little doubt that housing construction costs are going up.

Some analysts argue that the tariff hikes are just threats to achieve other ends. While that does not appear to be the case as of this writing, it could be. It also doesn’t matter much. If the tariffs come, the economy will eventually adjust. If the market must exist under the constant threat of tariff hikes, markets and business will view that as uncertainty and will price that uncertainty in, potentially at a higher rate than what would be caused by the actual tariffs. Markets and CEOs hate uncertainty and they charge for it.

Another argument posits that the price increases caused by tariffs won’t be significant because it will be a single shock. That argument fails on two points. First, there is an inherent assumption that there will be a single round of tariffs, all at once, and that will be that. There is absolutely no evidence that is the case. Tariffs could go up and down, tariffs can be taken on and off, virtually at a whim, and the threat of tariffs can be ongoing. The potential for tariffs to be a recurring shock to inflation could actually be quite high.

The other point is that a spike in inflation means prices go up, but when that spike subsides to a more normal rate, prices don’t go down, they just go up from the new, inflated level more slowly. This is why the reduction in the inflation rate from the high in the Biden administration doesn’t feel like a reduction in prices. Prices haven’t gone down, they’ve just gone up more slowly. The idea that a spike in prices caused by tariffs will be short-lived is just wrong. Consumers will have to absorb the full spike in prices and then endure lower, but on-going inflation on top of that.

BUDGET CUTS & NATIONAL DEBT

There is no doubt that our national debt and upward spiraling deficits are undermining the dollar. It’s not just a question of strength or weakness against other currencies; it’s a question of trust in America from those who would invest in the U.S. via the bond market. The stickiness of the 10-year rate, despite recent cuts in the Fed Funds Rate, should be seen as a red flag for the nation’s creditworthiness and a potential economic headwind that will not be easily addressed. As a nation, we must get serious about our debt and the deficit. Failure to do so could exacerbate a wide variety of problems, including housing affordability.

We are in a Catch 22. We must cut spending for the future health of our country and cutting spending slows the economy. Cutting too much, too quickly allows no opportunity for the economy to adjust to a changing situation, and could lead to a recession. The uncertainty element of this appears to be a direct input into falling consumer confidence which could pre-sage reduced consumer spending and a slowing economy.

Spending cuts are essential, but they must be done predictably, humanely, and with a plan to directly replace services and jobs so that the economy and people have the opportunity to adjust to the new reality without causing an economic crisis.

TAX CUTS AND DEREGULATION

It’s widely accepted that tax cuts automatically mean greater economic activity and tax revenues. The data show this is simply not true in all cases. Generally, lower taxes spur economic activity, but this has a diminishing return, the wealthier the recipients of the tax cuts already are, at least under our current code and brackets. The wealthy and near-wealthy tend to hoard large portions of their tax windfalls and not, as popular myth holds, spend the funds or re-invest them into the economy at a very high rate. At a certain level, tax cuts for the wealthy are a drag on economic activity and a contributor to deficits and debt.

Can tax cuts for the wealthy be positive for the economy? Of course they can. It’s this relationship that the Laffer Curve seeks to explain. However, history and data of past tax cuts demonstrate, with relative certainty, that we’ve passed this point on the curve, especially with regard to the wealthy, probably during George W. Bush’s administration.

Further tax cuts seem certain to raise the deficits and debt if spending is not cut. A balance between responsible cutting of the budget and maintaining or increasing revenue seems essential to securing the short- and long-term health of the economy. There does not seem to be broad support or leadership for this approach. Concern about an economic downturn in the short term and a more challenged rate and growth environment in the future may be appropriate.

From a real estate point of view, we are clearly in desperate need of deregulation and process reforms in government if we are going to address the nation’s housing shortage anytime soon. Apart from housing, it seems clear there are regulatory issues affecting many industries and an excess of roadblocks to progress at all levels of government. There’s no doubt that future growth and innovation in the economy would be greatly aided by reforms.

Some government departments and processes are essential to a modern economy. Trusting that the food we eat will not kill us (at least not immediately) and that the airlines we rely on for business and recreation are safe, are just two examples. Without these guardrails the lack of confidence in these industries, based on their past failures and bad behavior, could be economically catastrophic. We need reform and deregulation that is sensible and protects the public while clearing a lane for commerce to advance.

INTEREST RATES

Based on the current stickiness of inflation and clearly inflationary policies already in place, and likely to be enacted, and signs of strength elsewhere in the economy, it seems unlikely we’ll see significant Fed rate reductions this year unless there is major economic downturn.

The Fed’s own current forecast is 50 bps of cuts. That should be viewed as a best-case scenario, considering current policy actions and expectations. If less inflationary policies are adopted or current policies are adjusted, the picture may improve.

It’s important to note that Fed cuts in 2024 did little to nothing to lower interest rates on mortgages. This is the result of too much debt, ballooning deficits, and uncertainty in the Federal government. If we want the interest markets to re-set to more favorable, historic spreads, we need a government that is more fiscally responsible than it has been over the last two decades, but achieves that goal in a more predictable and reliable way than we are currently pursuing. Until policies are better aligned with goals of fiscal responsibility, or unless there is a significant economic downturn, there is no reason to expect the Fed to cut significantly or that such cuts would have any significant impact on the rates paid by consumers.

THE FORECAST

Significant reduction in rates in unlikely. I expect average rates above 6.5% on a standard 30-year mortgage for most, if not all, of the year. This relative stability should make it easier for consumers to make purchase decisions.

Housing prices in most states will probably continue to rise for the near term, but a slower rate of growth seems likely. Even if input costs increase, the existing challenges to affordability will require builders to absorb as much of the increase as possible to avoid building and holding unaffordable inventory. Expect a general slowdown in home building due to this combination of affordability challenges and inflation in labor and materials.

There are 8 states where home inventory has reached pre-pandemic levels. In these states there is potential for a buyer’s market but in some, especially Florida, it is less likely due to increased demand rapidly absorbing the new inventory. In at least 18 states inventory is still 40% to 61% below pre-pandemic levels, including Virginia at -44%. In these states, a buyer’s market anytime in the foreseeable future seems extremely unlikely. An additional 19 states are still 10-39% below pre-pandemic inventory levels. Buyers’ markets seem unlikely in the near to mid-term for these states as well.[ii]

The bottom line is that housing is going to continue becoming more expensive over time. We can expect rents to continue to climb in order to absorb every marginal dollar in this low-inventory environment, where buying a home is challenging, even if you can afford it. In most markets, if you are qualified to buy a home, there is not a better time visible on the horizon and you should act with all due haste.

One potential upside for buyers is that the buyer will likely remain smaller than normal and there should be more houses on the market in 2025 than 2024. It will still be a low inventory market, but the low buyer participation makes the market more balanced and may give buyers room to negotiate. 2025 may offer the opportunity to make a better deal and buyers should take advantage of that before the window closes or prices rise further.

If you have the means to invest, we believe rents are likely to rise. Home ownership rates are even lower than during the great financial crisis[iii] and unlikely to improve significantly in 2025. Investing in rental properties could boost cashflow and allow owners to capture the full appreciation of the assets.

If you are currently unable to purchase, we would recommend working toward changing that situation as steady, annual rent increases seem likely for some time to come, in most markets.

If you wish to sell a home, prices should increase nationally, but at a significantly lower rate than the runaway market of 2+ years ago. Sellers should adjust their expectations to a more reasonable, life-event driven sale, rather than the quick windfalls of 2020 and 2021. We advise you to price to reflect your market conditions, not your aspirations, as you may have a few years ago.

There are likely to be more houses on the market this year, so failing to price and negotiate well could lead to buyers bypassing properties entirely. Due to more difficult affordability and fewer buyers in the market, selling a home is once again a process that requires expertise in real estate and marketing. You should seek professional guidance to secure the best price in your market. Waiting to sell could make it more difficult as prices are likely to rise somewhat and interest rates are likely to stay close to where they are, and could go up, making the pool of buyers even smaller.

Despite the headwinds for 2025, it is likely to be a busier year in the real estate market than 2024, which was one of the slowest on record.

As always, consult an expert in your market for advice on your market and your situation. This forecast is broad and not intended as specific advice for any one person or location. This forecast is intended to analyze the economy and housing market in the context of likely conditions going forward. Specific policies can have varied effects depending on other policies and conditions of the moment, any of which could alter this outlook.

This analysis is forward-looking and could be wrong. It should not be used as the sole basis for any financial decision. This forecast is the product and opinion of the CEO of The Home Run Team Ltd. and does not necessarily reflect the opinions or expectations of REAL or any REAL agent or member agents of The Home Run Team Ltd.