Prepare for Mortgage Rates to Sink

Dave:
Hey everyone you are listening to on the Market and I’m here today breaking down what I think we’ll see in the housing market in 2025. We’re talking about rent prices, we’re talking about home prices, we’re talking about mortgage rates, all of it here today, and I actually made this episode originally for the BiggerPockets Real Estate podcast when I was just summarizing and trying to set expectations for the coming year, but I think it’s a really valuable episode to help just level set for what you can expect, or at least what I think you can expect for the coming year. So we’re going to air it on the market feed and I’d love to know what you think. So after listening, if you have any feedback, have different opinion about what you think is going to come in the coming year, let me know either in the comments, let me know on BiggerPockets, let me know on Instagram, I’d love to hear your feedback.
Let’s get to the show. So first I’m going to start with the big picture, and to me I would phrase it as this, I think we are close to the bottom for this housing cycle. As you may know, businesses or markets, they work in cycles. They go up, they peak, they come down during recession and then they bottom out. And I think there’s reason for cautious optimism as we head into 2025 that we are starting to bottom out. And I want to remind you, I do not always say this, I try to be straight with you all, but this year I do think that we’re through sort of the worst of this really tough, weird, confusing period that we’ve been in real estate. And although we are not out of the woods yet, I’m not saying that things are going to magically get better or instantly improve for investors.
I think we’re turning the corner and heading towards better days ahead. So that’s a high level, but I’m not going to just leave you there. I want to explain to you why I think this and share with you my specific predictions on mortgage rates, home prices and rentals for the coming year on to mortgage rates. I’m picking this one to forecast first for a reason because if we’re going to talk later in the show about housing prices, we got to first talk about the thing that’s going to influence housing prices the most, which to me is mortgage rates. If you listen to this show or follow any of my content, you know that for the last several years I’ve based a lot of my predictions around this idea that affordability is the name of the game. And you’ve probably heard this term affordability as a reminder.
It just basically means how easily the average American can afford the average priced home. And this has huge implications for society, but in real estate and what we’re talking about today, it really matters for supply and demand in the housing markets because when affordability is low, relatively like it is today, it reduces demand. Fewer people can afford to buy homes, they still want to, but they’re out of the market because they can’t afford it. And because of the lock-in effect, which you’ve probably heard of, it means that fewer people want to sell their homes as well because they don’t want to sell their home and then go on to buy another property in this really pretty difficult affordability environment. And affordability is dictated by three things. We talk about mortgage rates, home prices and incomes. And although incomes are going up, which is great, that moves pretty slowly.
And we’ll talk about housing prices, but I will give you a quick preview. I don’t think prices are crashing, so I don’t think that’s going to improve affordability. So if affordability is going to improve at all, it’s going to come from mortgage rates. And so that’s why I want to put this one first because mortgage rates is the key to affordability, which is the key to the housing market. There we go. Let’s take a minute and just talk about where mortgage rates are. They’re at 6.8%. I’m recording this in mid-December. That’s for an owner occupied loan, not necessarily for investors. Now whenever we talk about mortgage rates, I have to do this normal disclaimer that I repeat every single time. I just want to remind everyone that mortgage rates, although we all love following the Fed and they’re all over the news and social media, mortgage rates don’t directly track what the Fed is doing.
They’re influenced by the Fed, but mortgage rates actually have a lot more to do with a very curious group of people known as bond investors. Now you don’t want to get me going on the bond market because man, this stuff is boring, but it is super important. So I’m going to give you somewhat of the TLDR version so you know what’s going on, but you don’t actually have to learn any of this boring stuff. Basically what happens in the bond market almost directly influences mortgage rates. So the things I think you need to know right now as it relates to the bond market and mortgage rates is number one, when bond traders are afraid of inflation that pushes up yield and takes mortgage rates with them when they stock market is doing particularly well, that also pushes up yield and takes mortgage rates up with them.
So even if the fed lowers rates, this is why mortgage rates can stay relatively high because bond yields are not just thinking about what the Fed is doing, they’re thinking about things like other asset classes, inflation and recession. The big question is what are bond investors thinking about? What are they worried about? What’s the biggest risk? Is it inflation? Is it recession? Well, the market is telling us that they think inflation is the bigger risk right now, fears of recession seem to be receding over the last couple of months. And so because there is a sense that Trump is going to implement some stimulative policies that decreases the risk for recession, it increases the risk of inflation and that could keep mortgage rates a little bit higher. So I do think overall when we take all these factors into account, I believe rates will come down, but I think they’re going to stay in the sixes next year and probably be in the low to mid sixes about one year from now.
And frankly, I think this is a good thing at this point, personally, I will take any rate relief. It’s better than where we are today. It was better than where we were last year. Plus we have to remember that rate declines come with a trade off the federal funds rate. The Fed only cuts rates when the economy is not doing well. So we don’t want to see too much of that or it means something else has gone wrong. So overall, this is one of the reasons I have some optimism is that rates are probably going to get modestly better here in 2025. Alright, that was my first prediction. We are going to take a quick break, but after the break we’ll come back and I will share with you my prediction on housing prices.
Hey, everyone you’re listening to on the market, I’m here breaking down what I think we’ll see in the housing market in 2025. And next up we have home prices. And again, we did mortgage rates first because I think it’s going to be this big issue with prices. And again, I think everything is about affordability and how affordability impacts supply and demand in the market. Let’s talk about each of those things. We’re going to talk about demand. We’re going to talk about supply, but let’s start with the easier one in my opinion, which is demand When there’s low affordability like we have right now, this somewhat intuitively I think drives down demand because investors or people who are just looking to buy a home can no longer afford to buy their desired properties. There’s actually been all sorts of studies about this, but most of these metrics of desire to buy a home are still really high.
It’s just that people are priced out of the market. The National Association of Home Builders has said that some over a hundred million American households are currently priced out of the housing market. So that is a lot of pent up demand that isn’t in the housing market that would probably like to be. We know that from other surveys of renters for example, that the vast majority, like 90% of American renters under the age of 45 want to buy a home. They just can’t afford it. So that is why affordability matters because it’s this huge lever in the demand side of the equation. It also, as I talked about earlier, matters in the supply side because the 80% of people who sell their home go on to buy a new one. And when affordability is low, it just makes it that not very appealing to sell your house and go on and buy a new one.
So when you’re betting on prices and trying to make forecasts like I am for next year, you’re in my opinion, essentially betting on affordability. At least that’s my theory for the coming year. So the question is what happens to affordability? And I already told you I think that rates will go down and this should free up supply and demand and also increase sales volumes. But I want to say that I don’t think it’s going to be huge, just like I don’t think mortgage rates are going to come down in this really dramatic way that’s not going to really free up that much inventory. I’m thinking maybe we get 10% increase in sales volume, hopefully 15 or 20%, but that’s not going to fundamentally get us back to what I would call a healthy housing market. But at the end of the day, I think this will improve.
There’s still going to be more demand than supply. The thing that I should note is that even though rates are coming down, it is not going to hit what I would call in the industry. We also call this magic mortgage number. They’ve done this studies that say at what point at what mortgage rate will supply unlock and will the market start to get better? And it’s consistently somewhere in the five to five point a half percent range. And because I told you I think mortgage rates are going to stay in the sixes, we’re not going to hit that magic number and that’s why I don’t think we’re going to see this huge increase in sales volume. I think it’s going to be much more modest. So all that said, factoring in supply demand, mortgage rates, all the things, my forecast range for home price appreciation on a national basis is one to 5% year over year growth.
That’s the range I think will fall in. Basically that’s another year of normal appreciation sort of like this year. And that is a good thing. We saw over during the pandemic, these massive run-ups in appreciation, 10%, 15%, that is not normal. A normal year is when appreciation somewhat closely tracks the rate of inflation, which is probably going to be two to 3% next year. And so I think that’s where we’re going to be for appreciation, a relatively normal year, of course it could go higher. I think there’s actually some upside case here if rates fall more than I think they will, and that is certainly possible. But this is sort of what I think is the most probable thing. If you know me at all, I am a data analyst, I’ve been trained in that. So I think a lot of probabilities, I think this is the most probable outcome, but there is some upside as well.
And if you’re wondering about some of these other things that could impact housing prices, other than what I just talked about other than affordability, are you thinking about foreclosures? It’s just not really going to impact the market. They’re about one 10th of where they were during the great recession. And honestly, the more important thing for the housing market is not credit card debt or loans or foreclosures, it’s actually the mortgage delinquency rate. So basically more people not paying their mortgage, that is absolutely not happening. I’m staring at a chart right now of mortgage delinquencies and they are at the lowest rate they’ve been on the chart, which goes back to 1979. So if there’s this idea that there’s going to be a crash caused by people for selling and fire selling their homes, sorry, that is not going to happen. It could happen sometime in the future, but next year extremely unlikely to happen.
Some of the other things that could impact the market, but I don’t think are going to be major players or things like new construction completions are up there is more new construction, but new construction makes up something like 10, 20% of the total market and it is up only a little bit. So it’s not really going to fundamentally change the market. Plus new permits to build even more units are down. So this trend is going to reverse itself. So I don’t think that’s going to be a major player in home prices for existing homes. The other thing that I do think is sort of this X factor that everyone should keep an eye on is some of the economic policies that Trump has promised to implement in his second term. The first one that we know a little bit more about is taxes. He’s stated again and again that he’s likely to at least extend, if not expand the tax cuts from 2017 that he implemented.
And that tends to be good just for sort of stimulative for the American economy. And there are some thoughts out there, at least some tax benefits that would be particularly beneficial to housing and to real estate investors have been floated. We don’t know if those are going to happen, so I’m hesitant to make predictions based on things we don’t really know about yet, but that is something I would keep a close eye on in the coming year. The second thing about Trump’s economic policy is tariffs. And this one’s a little less certain because he’s said that he’s going to implement tariffs, but we don’t know exactly what those would look like. And the implications for the housing market will depend highly on the details of these particular policies. Like if he imposes tariffs on construction equipment for example, that could really impact the housing market.
If it happens to be more technology that gets tariffs, that probably won’t impact that housing market as much. If it’s a blanket tariff across everything from Mexico and China, that could impact the highly market. So we’re just going to have to wait and see. I think that they are unlikely to have a huge impact in 2025, but it’s something that could if they’re implemented quickly and if some of the more aggressive tariffs that Trump has talked about are implemented. So keep an eye on those things. So that’s why all those things combined. Again, one to 5% is my national forecast. So far we’ve done our mortgage rates. I think they’re going to be in the low sixes this time next year. Home prices one to 5% up this time next year after the break, I’m going to get into the third thing that I think investors should be paying attention to, which is rent, price, growth. We’ll be right back.
Welcome back investors. Time to talk about our rent forecast. I’m going to sort of split our rent conversation into two buckets. We’re going to talk about residential small property rent. So this is single family homes, duplex, plex, quadplex, anything that’s officially considered residential real estate, five units or above is considered commercial real estate. And I’m going to call that multifamily. So just so you know throughout this thing, if I say a residential that I’m talking more about small duplexes, single families, and the reason I’m doing this is because the patterns are different. What’s going on in residential rents and what’s going on in multifamily? Rents are different, but they impact each other. The things that are impacting specifically multifamily are something that everyone, whether you buy and operate multifamily real estate or not, should be paying attention to. So let’s just talk quickly about multifamily.
First things first, rent growth in multifamily. It was just crazy. During the pandemic, you all probably saw this or experienced this, we saw 10% in 2022 that has basically reversed completely. It was down 1% last quarter below the pace of inflation. There’s lots of different data sources for this kind of data, but they basically all say that they’re somewhere close to flat. If you look at the CoStar, Zillow, it’s going to be a little bit different. Now, of course, this is national, right? So rent is still growing in some areas. If you look at the Midwest, things are going okay in DC and Detroit and Cleveland, they’re up. But on the other hand, you do see places like Austin and Raleigh, really hot markets see declining rents. That’s kind of weird, right? It’s not super intuitive that we are going to see some of the hottest markets in the country see declines.
But let me just explain this because I think we’ll help you understand where rents are going back in 20 20, 20 21, 20 22, when things were great and developers and real estate investors, they saw all these people moving to Sunbelt. They saw Austin was on fire, so was Raleigh, so was Tampa. All of these places are growing so quickly they’re like, we got to build some apartments there. And so they started building apartments there. But with multifamily, it can take a couple of years for those apartment buildings to be completed. And so we’re only now in 2024 and into 2025 seeing the new apartments come online and they’re all just in this weird way sort of hitting at the same time. And so even though Austin and Raleigh have great underlying fundamentals, great population growth, all this stuff is going well for them. There’s just so many apartments coming all at once that there just aren’t enough new tenants in any given month to fill up all these apartments.
And that means that multifamily operators in these hot markets are having to compete against each other. And the way you compete is by lowering prices. And so that’s why we’re seeing multifamily rents somewhat flat, a little bit negative nationally and more negative in some of these more sort of hot markets. And then of course, the opposite is also true. The reason we see Cleveland, dc, Virginia, some of these places in the Midwest still growing in terms of rent is because developers didn’t get super excited about those markets in 2021 didn’t start building multifamily and they don’t have this same huge influx of new apartments that we are seeing in these other places. The unfortunate part of this means that rents are not keeping pace with inflation in multifamily right now, but the pendulum is going to swing back. The thing I love really about multifamily is that it’s super easy to forecast.
You can see how many permits were taken out years ago and when they’re going to hit the market, when the construction is scheduled to complete. And so we’re going to go from having something like 200,000 deliveries, new apartments in the country per quarter right now to 100,000. It’s going to drop in half, and we know that that’s going to start around the middle of 2025. So we already know that the pendulum’s going to swing back in the other direction. And this actually bodes well for long-term rent growth because by most estimates, we are somewhere between one and 7 million homes short in the United States. So we need these apartments, we just need them to get spaced out a little bit. The problem is that they’re all coming online at the same time. If they were just spaced out, this wouldn’t actually be a problem. But when construction not only goes back to normal but actually goes below normal levels because developers have been turned off by this oversupply, we are probably going to see rents start to grow.
I do think that means that all this thing said in multifamily, we are going to still see flat or maybe negative rent growth, at least in the first half of 2025. I think things will start to get better in the second half of the year, but rents do tend to lag a little bit, and I think we might not see great growth in 2025. Hopefully by Q4, the end of next year it’s starting to be a little bit better, but I think rent growth is going to be pretty good in 2026 and beyond. That’s something I’m going to talk a lot about on Monday when I share my long-term opinions on real estate. I think the prospect of rent growth over a five year period is great. It’s just not very good over a one year period. And that’s something I want all real estate investors, people listening to this to think about as you’re underwriting deals and planning for your portfolio.
Now, that was my analysis of multifamily, right? So I think it’s going to be relatively flat. Single family rents are actually up right now. They’re up like four or 5% depending on who you ask. And so that’s really good. That’s above the pace of inflation. That’s what we want as investors because when your expenses, your taxes, your insurance go up faster than the pace of your rent, you’re losing spending power, your profit is getting diminished. And so in single families and small residential rents are still going up right now. And I do think that will continue. I believe personally that multifamily is going to impact single family rents in the cities where there’s a lot of supply and that will probably drag on overall rent growth next year, maybe 3% in single family, 1% in multifamily is sort of where I’m coming out ish, give or take one or two percentage points for my forecast.
So a little bit better for single family and a small multifamily, not amazing, but keeping pace with inflation, which is great. Multifamily probably going to lose some ground when you actually compare that to inflation. That is my forecast for rents in 2025. All right, that’s what we have for our episode today. I hope you all enjoyed it. Maybe this taught you a little bit about what to expect in 2025, and hopefully this can help you plan some of your investing or your business decisions. I just want to say at the beginning of this year, I am excited, I am eager, and I want to thank you all for listening. I think we’re going to have a great year as a real estate investing community and as an on the market community. We have some amazing shows planned for you. So make sure just tune into every episode of On the Market in 2025. I’m Dave Meyer, thanks for listening. We’ll see you soon.