Another Year of Wait For Homebuyers, Builders & Realtors

No Improvement in home purchasing affordability expected in 2025

Another Year of Wait for Homebuyers, Builders & Realtors

No improvement in home purchasing affordability expected in 2025

Overview

Since 2020, the average monthly payment for a new home has doubled. On top of that, in some regions, insurance premiums have climbed dramatically. These high costs have deterred ownership. More than 65% of US households own a home. For young adults that rate is at 39% - down from 45% 20 years ago. First time homeowners are currently at the lowest level ever. None of these factors are expected to improve during 2025. Indeed, the Administration’s policies on immigration and tariffs may make the cost of building a new home even more expensive – worsening the near-term affordability difficulties facing home buyers.

Home price increases will slow, but remain elevated…

Oddly, interest rates are partly responsible for keeping home prices elevated. Many owners of existing homes purchased their homes when mortgage rates were 3%. At today’s mortgage rates, many of these homeowners will hold off selling their home in place of a new one because they would likely be replacing a low mortgage rate (3%) with a much higher mortgage rate for the home they move into (7%).

By these homeowners staying in place, the supply of existing homes on the market in reduced. Typically, existing homes account for roughly 88% of all homes on the market (newly constructed homes account for the remainder). Like anything, when supply is reduced, the outcome is high prices. Without a reduction in mortgage rates, a good portion of existing home buyers will remain on the sidelines. Supply will remain constrained. Prices will remain elevated.

Policies add to construction cost pressures….

Supply conditions could darken the US home price outlook further. According to various estimates, 1.6 million undocumented persons work in the construction industry. Prior to the clamp down on undocumented workers, it was generally thought that construction workers were in short supply. The crack down on immigration will likely magnify this labor shortage.

Undocumented workers offer builders a capable workforce at a lower pay rate than documented construction workers. Some studies suggest that undocumented workers earn an average of $3 per hour less than documented workers. The average home requires roughly 5,200 manhours to build. If the entire crew were undocumented, that translates into a savings of $16K per home. The entire crew won’t be undocumented – so the savings will be well less. Nevertheless, undocumented workers help relieve the labor shortage that characterizes the construction industry and can potentially lower the cost of building a new home. Rigid immigration enforcement will reduce the ability to build new homes and add to construction costs.

Tariffs also add to the cost pressures. Roughly $200 billion of imported products went into building new housing units throughout the US during 2023. Spending includes lumber, lighting, cabinets, tools, appliances and more. Per unit, that translates into roughly $135,000. Of this, 27% of all imported products used to construct a new housing unit came from China. That translates roughly into $35K per unit. With the new tariff scheme, that cost could add as much as $150K to costs. It won’t because there will be substitution away from Chinese made products. Not all goods used to build a housing unit imported from China will be replaced. Significant const pressures from the new tariff scheme will add to the cost of building a new unit.

New, policy induced factors could add to the cost of building a home. Some, or all, of these increases will be passed onto consumers in the form of higher home prices. Furthermore, the potential for building disruptions loom. Resulting shortages could add to overall home prices.

Mortgage rates aren’t moving much this year…

Mortgage rates play a critical role in the affordability crisis facing potential home buyers. Barring a full-blown recession, mortgage rates are not expected to come down meaningfully anytime soon.

Inflation premiums and Federal Reserve policy are expected to work against lower near-term mortgage rate decreases. The Federal Reserve won’t begin easing until inflation is on a clear path to its 2% target rate. Unfortunately, tariffs raise the prospect of higher inflation. As a result, the Fed is expected to sit until it can assess the inflationary impact.

In the meantime, interest rates will only slowly drift lower as demand in the overall slowly economy eases. For the most part, key interest rates, such as 30-year conventional mortgage rates, will remain near the 6.5% to 7% range for most of 2025.

The threat of a recession, and the lower inflation it implies, will eventually prompt the Fed to act. A lot of time has to pass for that to happen. Even as momentum of the recession/downturn gains strength, the Fed will likely sit. Only after the threat of higher unemployment reaches a level to ensure an easing in inflation, will the Fed act to cut.

A click or two reductions in mortgage rates is not going to improve affordability much. There is a threshold mortgage rate for a meaningful improvement in homebuyer affordability. I estimate that threshold rate at 5.5% for a 30-year conventional mortgage. Once that threshold rate is achieved, it will ignite a significant recovery in the housing sector. Until that time, modest improvements in affordability will likely take place in the context of a weakening labor market.

Sales and starts are likely at a saddle point – neither rising nor falling much from a depressed 2024 market. Unfortunately, the threshold mortgage rate that ignite a dramatic recovery is not expected to materialize for another year. While market conditions can vary greatly among regions, for the US as a whole, this implies another year of wait for homebuyers. Another difficult year for homebuilders and realtors.

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Brief Bio

Ed Sullivan has held senior level positions at the Portland Cement Association, Chase Manhattan Bank Economics, Standard & Poor’s, and Wharton Economics. Ed has lectured at The War College, Fordham University, Fairfield University, Manhattanville College, Villanova and St. Joseph’s University. The Chicago Federal Reserve has cited Ed for his forecast accuracy. While at the CIA, Ed has played supportive analytical roles in major US trade policy including Japan's Voluntary Automotive Export Restraints and NAFTA.