A higher-for-longer interest rate environment has the U.S. economy stuck in place, with existing home sales in 2024 falling to their lowest level since 1995. While higher borrowing costs have moderated demand from the pandemic housing frenzy, the biggest challenge in today’s market isn’t just demand – it’s a lack of sellers.
The Housing Market’s Supply Crunch
Homeowners remain locked in.
The 30-year fixed mortgage rate has averaged 7.1% at the start of 2025, making it financially painful for homeowners to trade up. Move-up buyers, a key driver of housing turnover, remain on the sidelines, keeping inventory tight even as first-time buyers remain active. According to Zillow data, the number of existing homes for sale in December is on the rise but remains roughly 25% below pre-pandemic levels.
Fewer job changes = fewer moves
With the labor market cooling, fewer people are switching jobs, leading to fewer relocations and keeping existing home inventory low.
A bright spot? A late-year rebound
Despite the challenges, existing home sales picked up in November and December, suggesting that demand is still present – if supply constraints ease.
Builders Step in to Fill the Gap
With existing inventory tight, homebuilders have stepped in to help meet demand. New home sales in November 2024 were up nearly 9% year-over-year, reinforcing the idea that supply – not demand – was the primary constraint on the housing market last year.
This week’s new home sales report for December will confirm whether this trend held through the end of the year. If builders continued to drive sales, it would further validate that buyers are still waiting for an opportunity to enter the market.
Beyond increasing supply, builders are using incentives such as rate buy-downs and cash toward buyers’ transaction costs to make purchases more affordable. In 2025, the builders that thrive will be those that continue to innovate – building smaller, denser, and more efficiently.
Beyond Housing: Trump Tariffs, PCE Inflation and the Fed Take Center Stage
Inflation pressures remain.
While core inflation continues to move toward the Fed’s 2% target, headline inflation has rebounded, largely due to rising energy prices and food prices. This is being exacerbated by the current administration’s latest move to impose tariffs on goods from Colombia, which could drive up the price of some items Americans buy every day. The price of crude oil and coffee could be most affected. Inflation expectations have also ticked higher, making the Fed’s policy decisions more complex.
FOMC Interest Rate Decision
The Fed is expected to hold rates steady, but Fed Chair Jerome Powell’s tone in the press conference could drive major market swings.
Markets will be watching for any signals about when rate cuts could begin.
Monetary policy is considered restrictive when the real federal funds rate (R) exceeds the neutral rate (R*), meaning R – R* > 0.
The real rate is determined by subtracting expected one-year-ahead inflation from the nominal federal funds rate.
The latest data suggests Fed policy may not be as restrictive as previously thought.
One-year-ahead inflation expectations rose to 3.3% in January from 2.8% in December.
This increase has effectively lowered the real federal funds rate, making policy less restrictive than before.
At the same time, if the neutral rate (R*) has risen, current monetary policy may not be as restrictive as previously thought.
For now, traders expect the first rate cut in May, but a more hawkish tone from Powell could shift expectations, pushing Treasury yields higher.
What It All Means
The U.S. 10-year Treasury yield is the benchmark for long-term borrowing rates, influencing everything from credit cards to mortgages.
A rise in yields would increase borrowing costs, making it harder for households and businesses to borrow, invest, and expand.
For housing, higher mortgage rates will keep affordability challenging. Builders that embrace density, efficiency, and incentives like rate buy-downs will have a competitive edge in 2025’s high-rate environment. The shift toward higher-density housing and creative financing solutions is here to stay.
