2024 RECAP
2024 has been one of the most positive years in recent memory for asset prices – nearly everything has risen with a strong economy, wage growth and the prospect of more manufacturing buoyed by the CHIPS Act.
The Fed managed to accomplish a "soft landing", a feat rarely achieved. Inflation showed real progress, nearing the Federal Reserve's 2% target, while the labor market remained steady despite cooling in some sectors compared to previous years. Wage growth slowed, easing inflationary pressures, while consumer spending continued to grow. The concept of Income and Wages is evolving in real-time, with the economy giving many alternative ways to make money – this is very exciting, and it makes the U.S. economy's ability to adjust better than other developed countries.
At the heart of the narrative, the Federal Reserve played a central role, finally shifting from years of tightening to cutting interest rates in 2024. While these cuts brought some relief, affordability remained a challenge. Mortgage rates, although lower than their multi-decade highs, hovered around 7%, keeping homeownership out of reach for many. It's important to remember that while associated with the Fed Funds rate, mortgage rates are more correlated to the 10 and 30-year Treasury rates and are based on the secondary market pricing of mortgages.
The housing market mirrored these dynamics. Home sales saw ups and downs, starting strong in Q1 but dropping to 15-year lows by summer as rates spiked. However, as mortgage rates began to decline in anticipation of rate cuts, activity picked up in the fall, signalling a gradual recovery heading into 2025.
2025 OUTLOOK – WILL WE SEE A CONTINUATION OF STRENGTH?
The year ahead is shaping up to offer more opportunities for homebuyers as the market stabilizes. The Federal Reserve is expected to take a gradual approach to monetary easing. Mortgage rates are forecast to stabilize near 6%, which could become the "new normal." While this isn't as low as the pandemic-era rates, it's a significant improvement over 2024 levels, making homeownership more accessible to millions of households.
According to a recent NAR report, If rates stabilize around 6%, approximately 6.2 million households could regain the ability to afford a median-priced home. Inventory is also expected to improve as new construction ramps up and more homeowners decide to list their properties. Housing starts are projected to approach the historical average of 1.5 million units annually, though inventory will likely remain below pre-pandemic levels.
Home prices are projected to rise at a modest 2% rate, marking a more sustainable pace compared to previous years. The upshot is that growth will be "less bubbly" but more stable and predictable.
Personal View
I am torn between what I hope the Fed will do and what the market is pricing in. The Fed, unlike other central banks, does not like to surprise the market – and the market is pricing in ONLY 2 cuts in 2025.
The three major components of a fiscal budget are entitlements, defense spending, and interest expense. I can't see entitlements being cut, given how unpopular this would be politically. Defense spending is more important now than ever before, which leaves us with interest expenses. I think Yellen and Powell will ultimately come to an agreement to cut rates and reduce interest payments. Then again, this is hope and not what the market is pricing in.🤞
Many of you will have heard me say this: policymakers can not directly affect housing supply, only housing demand. That is why policies like Stamp Duties are so popular (see Singapore) to cool or stimulate the market. You can't exactly "force" Lennar (largest homebuilder in the U.S.) to build 7M homes (exactly how short the market is) to meet existing demand for homes. Even if they did build 7M homes – the only ones that could afford to purchase these would be institutions and investors.
The dream of owning a primary in the home is dead (yes, I said it) – affordability has gone past the point of no return withaverage homes in the U.S. nearing $500K! Society will gradually adjust to renting, much like in Europe, pushing up rental yields for investors. BTW, Blackstone and its pals know this.
10 FACTORS DRIVING THE U.S. REAL ESTATE MARKET IN 2025
The National Association of REALTORS® (NAR) identified 10 key factors that will shape local housing markets in 2025:
- Fewer Locked-In Homeowners: Areas with fewer homeowners tied to ultra-low mortgage rates will see more properties listed, increasing inventory.
- Lower Average Mortgage Rates: Markets with lower rates enable more buyers to qualify, boosting demand and sales activity.
- Faster Job Growth: Strong job markets drive housing demand and affordability, especially for first-time buyers.
- Millennial Buyers: Areas where more millennials can afford homes will see higher demand for starter homes.
- High Net Migration: Regions with strong population growth will experience increased housing activity.
- Households Entering Buying Age: Areas with more households reaching their mid-30s will see stronger demand.
- Movers Purchasing Homes: A high percentage of movers choosing to buy signals long-term market stability.
- Longer Homeownership Tenure: Regions with homeowners surpassing average tenure may see more listings.
- Starter-Home Inventory: Markets with more affordable starter homes provide opportunities for first-time buyers.
- Home Price Appreciation: Faster appreciation indicates strong demand, wealth generation, and investment potential.
10 CITIES TO INVEST IN 2025
In the same NAR report, they selected 10 areas expected to outperform for their strengths across these factors:
- Boston-Cambridge-Newton, MA-NH: Stabilizing rates and a high share of starter homes make this market appealing.
- Charlotte-Concord-Gastonia, NC-SC: Strong job growth and migration trends drive demand.
- Grand Rapids-Kentwood, MI: Affordable housing and a reduced "lock-in effect" create opportunities.
- Greenville-Anderson, SC: Affordability and strong migration patterns make this market a standout.
- Hartford-East Hartford-Middletown, CT: Low rates and inventory potential improve affordability.
- Indianapolis-Carmel-Anderson, IN: Job growth and affordable housing attract buyers.
- Kansas City, MO-KS: Competitive rates and affordability boost its appeal, especially for millennials.
- Knoxville, TN: Strong migration and wealth gains drive long-term market stability.
- Phoenix-Mesa-Chandler, AZ: A growing population and strong job market fuel demand.
- San Antonio-New Braunfels, TX: Job creation and favourable mortgage rates support market growth.
THE UPSHOT
While 2025 won't return to the ultra-low mortgage rates of the pandemic, the year is set to offer more balance, with stabilizing rates, improving inventory, and sustained demand. For homebuyers, this marks a promising shift toward greater accessibility and opportunity in the housing market.
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