The Marketwise Blog, Jan 13th
As we kick off the new year, three key developments dominate the housing landscape: tepid demand growth even as inventory levels improve, a renewed push to privatize government-sponsored mortgage giants, and a market stuck in limbo awaiting a meaningful drop in mortgage rates. The following brief stories delve into these issues, unpacking the factors that influence both short-term and long-term trends in real estate.
2025 Kicks off with Demand Almost Flat Year Over Year
Pending home sales are barely up year over year—just 1%—as higher mortgage rates near 7% continue to slow growth heading into the spring market. Although Altos Research’s weekly contract data is still marginally positive compared to previous years, the risk is that more rate hikes could reverse even this small annual gain.
At the same time, inventory levels are healthier than in 2020–2023, new listings have improved from the holiday lows, and mortgage rates—while elevated—haven’t yet hit the worst-case spreads of past years. With a forecast range of 7.25%–5.75% for mortgage rates and 4.70%–3.80% for the 10-year yield, buyers and sellers alike remain cautious, watching key labor and economic indicators to see if they’ll further influence rates and stifle the fragile demand growth we have.
A Renewed Push to Privatize the GSEs
A broad push to privatize Fannie Mae and Freddie Mac is expected to gain steam under the Trump administration, though this poses significant risks to the housing market and the broader economy. Currently, these government-sponsored enterprises (GSEs) underpin roughly 70% of U.S. mortgages, and removing their federal backing could potentially raise borrowing costs. A roadmap released by the Treasury Department and the Federal Housing Finance Agency outlines how privatization might work but remains vague on major details such as paying back the hundreds of billions owed to the Treasury and ensuring mortgage rates don’t spike. While GSE stocks jumped on the news, the plan from the lame-duck administration could easily be reversed by the incoming Trump team, which has not officially addressed the issue.
Privatization is made more complicated by Fannie and Freddie’s reliance on a risk-free borrowing rate tied to their government sponsorship. Stripping that support would likely downgrade their credit ratings, increase their borrowing costs, and push mortgage rates higher for the public. Previous attempts at reform—driven by the desire to end federal control and recoup taxpayer money—have repeatedly failed, and housing experts point out that no plan has yet squared the circle of repaying the Treasury, limiting systemic risk, and protecting homeowners from surging rates. In short, despite renewed enthusiasm under Trump 2.0, the complexities of disentangling these GSEs from government support mean meaningful action may still face serious roadblocks.
Housing Demand in Limbo to start 2025
Housing demand is stuck in limbo with not a lot of pretty options for it to return to levels seen before 2022. Today’s stronger-than-expected jobs report underscores why mortgage rates remain elevated: despite some softening from the hiring frenzy of 2021–2023, the labor market still isn’t weak enough to bring rates down. Non-farm payrolls in December rose by 256,000, unemployment held near 4.1%, and health care, government, and social assistance all posted gains. Meanwhile, residential construction jobs—crucial to housing—aren’t yet declining, which means there’s little upward pressure on unemployment. The result is that bond yields stay high and mortgage rates hover around 7.24%, putting a damper on housing demand.
Looking ahead, housing demand is poised to rebound only if the labor market slows more dramatically, pushing bond yields lower and driving down mortgage rates. Manufacturing and construction are two sectors to watch, as deeper job losses here could lift unemployment toward the Fed’s 4.3% forecast, creating conditions ripe for a pivot in Fed policy. With job openings still above 8 million and the Fed taking a more hawkish stance, a meaningful drop in rates seems unlikely in the immediate term. However, if economic growth cools enough to soften the job market, mortgage rates could decline, giving homebuyers the relief needed for demand to recover.
Wrap Up
While current data highlights the complexities in housing—ranging from barely positive demand to potential seismic policy shifts—there are still reasons for cautious optimism. Should labor market metrics soften and bond yields decline, mortgage rates may improve, offering a catalyst for stronger buyer activity. Until then, monitoring employment trends, new listings, and the ongoing debate over Fannie Mae and Freddie Mac will be vital to understanding how and when housing demand might climb back toward pre-2022 levels.
