Economist and financial historian Peter Bernstein famously said, “Forecasts create the mirage that the future is knowable.”
Unpredictability often emerges in the face of expectation, and the only staple of the future is uncertainty. Look no further than 2024 for the latest example. Following the Fed’s 50-basis point (bp) rate cut in September, historical precedent told us mortgage interest rates would decline. And they did, until they didn’t, stubbornly hovering closer to 7% than to 6%.
Market fundamentals and historical norms can give strong indications of what might happen, but how things play out may be far different. Heading into 2025, shifts in several key factors and indicators suggest the coming year in the housing market may transpire much differently than the post-pandemic years that preceded it.
Mortgage rates, inventory levels, the labor market, land availability, and the regulatory environment are five areas that will play a large role in shaping how the housing market behaves in 2025. To gain a sense of how these factors could influence the housing market, housing economists from across the industry spoke with BUILDER about their expectations for the year to come.
Mortgage Rates
With the Federal Reserve entering a period of easing, indicated by the messaging following its 50-bp cut, the natural first place to look for knock-on effects is mortgage rates. Mortgage rates go down ahead of a Fed rate cut and then see another drop as the cuts happen.
“With the continued easing of Federal Reserve policy and an ongoing slowing economy, the expectation is that we will see a gradual but uneven downward movement in long-term interest rates,” NAHB chief economist Robert Dietz says. “The expectation is that in 2025, on a sustained basis, mortgage interest rates will move slightly below 6% by the middle of the year.”
For Zonda chief economist Ali Wolf, mortgage rates are more likely to be down than up in 2025, but “it will be a bumpy path.”
“Just look at what happened in September and October: Interest rates moved over 50 bps based on incoming data.”
Mark Palim, chief economist of Fannie Mae, echoes Dietz’s sentiment, forecasting that mortgage rates will trend down gradually as the Fed continues its easing pattern. Wolf, Palim, and Dietz note that the 10-year treasury yield will remain an important indicator to track in 2025 regarding mortgage rates.
“While the Fed is easing on the short end of the curve, it is continuing to pursue tightening policy on the long end of the curve by reducing the balance sheet that was built up during [the pandemic],” Dietz says. “That means that the spread [between 30-year fixed-rate mortgages and the 10-year treasury] is not going to go back down to its 160- to 180-bp, pre-COVID range. But we do expect the spread to compress somewhat.”
While the decline in mortgage rates may increase consumers’ perceptions of the economy, consumer spending patterns have largely held up in the overall economy despite pessimism.
“Post-pandemic, we’ve had a period from both forecasting and tracking the economy where consumer sentiment and what consumers are doing with their pocketbook is diverging,” Palim says. “I don’t think the lower consumer sentiment should hurt the building industry. The lower mortgage rates will be helpful.”
Wolf hopes that lower interest rates, with more certainty around the Fed and a settled election, will get more consumers off the sidelines during the spring selling season. Dietz says consumer survey research suggests that if the market can offer mortgage interest rates with 5 as the first digit, then a “disproportionate amount of housing demand becomes priced back into the market.”
I expect that over the course of this [Fed] easing cycle, which will continue through much of 2025, the Fed will ultimately lower the fed funds rate to about 3%. That would represent about 250 bps of cuts,” Dietz says. “The market has priced much of that into long-term interest rates, so there is not going to be a one-for-one reduction in mortgage rates from where we are now to where we are going.”
Fed rate cuts should also signal positive developments for interest rates on builder and developer loans—AD&C loans. The movement on such loans tends to move more directly with the short end of the curve.
“Right now, AD&C loans are in the neighborhood of 12% to 14%. A decline of 200 bps from where we are now [from the Fed] would be a very useful thing in terms of granting the ability of the market to expand,” Dietz says.
Inventory Levels
The extent to which lower mortgage rates activate the resale market will be a significant element to track for builders and the overall housing market in 2025.
As mortgage interest rates rose above 7%, the lock-in effect took hold for existing homeowners and led the monthly supply of homes available for sale in the existing market to drop below two. The month’s supply for existing homes has increased to above four as rates reduced. The month’s supply figure is roughly seven to eight months on the new-home side. While the historical norm for a balanced market is six months’ supply for new homes, the existing home inventory has been so low that the overall monthly supply has been in a healthy range.
“Our expectation is we will continue to see some additional [existing-home] supply come on [the market],” Palim says. “The key question will be: Given how much home prices have gone up since the start of the pandemic, where will demand be? As interest rates have come down, that certainly helps affordability. But homes are still quite expensive relative to where they were four or five years ago. What will get revealed is how much demand there is as the lock-in effect diminishes.”
Dietz says resale inventory levels are already starting to rise in specific markets, including Florida and Texas, but remain below conventional normalized conditions.
“A lot of people are focused on simply the demand impact of lower interest rates. We have already seen supply tick up in select parts of the country—Florida, Texas, Arizona, Colorado, and Utah—and we expect to see a continued improvement for inventory for 2025,” Wolf says.
On the new-home side of the equation, Zonda surveys indicate that most builders plan to increase starts in 2025 compared with 2024. This aligns with Zonda forecasts, which call for 3% to 5% growth in single-family starts. Builder optimism stems from better—but still tight—land availability, lower interest rates, and pent-up demand.
Palim projects that new-home sales will increase in 2025 at a smaller rate than existing-home sales due to the new-home market’s strong position relative to the existing-home market.
“As mortgage rates go down, we are going to get that supply response from builders because construction loan financing is going down in terms of interest rates,” Dietz says. “We are going to get a supply response increase from existing homeowners due to a diminishing impact of the mortgage rate lock-in effect. The expectation is that existing inventory is going to rise, [and] that is going to result in that total home inventory measure increasing.”
Dietz does not anticipate the rise in inventory slowing the pace of new-home construction until the total number of months’ supply gets closer to six. Thus, the market is still “lean,” meaning builders can continue to expand supply. However, as more existing homes come on the market, home builders likely will lose some pricing power as competition increases.
Land Availability
An issue reported by home builders is land and lot supply. Delays in land development—including entitlement, zoning, and plan approval—drive up development costs. Land is an important constraint on the number of new homes that can be built.
NAHB survey data indicates that builders remain concerned about land and lot availability in 2025, and the implications could contribute to lower construction activity in the medium term. Even in 2024, Zonda’s declining Lot Supply Index (LSI) indicates that the pace of new construction is outpacing the rate at which vacant developed lots are coming online.
“Think about the leads and lags as we enter an expansion mode with the Federal Reserve policy easing. Home buyer demand is going to return to the market faster than lot supply can expand,” Dietz says. “AD&C loans will go down. But, even in an efficient market, that can still be a two- to three-year lag in terms of seeing an uptick in lot availability.”
Despite concerns about the land market, high competition, and high land costs, many builders are still bullish in their approach to the land market.
“Most builders are telling us they are ‘full steam ahead’ on land acquisition because there is no home building organization without land,” Wolf says. “The strong land market suggests that there won’t be a considerable drop in new-home prices simply because land represents between 20% and 50% of a final home price, depending on location.”
Zonda’s LSI suggests that total upcoming lots—expected to be delivered in the next 12 to 18 months—have declined in recent quarters, with nearly three-fifths of upcoming lots being excavated.
“My expectation is we are going to hear more builders cite lot and land access issues and cost issues in 2025 as single-family home building increases [and] as housing demand increases,” Dietz says. “But we face a lag between the cost of financing that additional lot development and the real-time need for lots to build on.”
Labor Shortage
The perception of construction’s labor shortage shifted in 2024 as the multifamily and single-family construction sectors slowed. As a result, the shortage of workers in the construction industry measured at 250,000 rather than around 400,000, where it had been for the year prior. Builders surveyed by Zonda indicate labor is “not the limiting factor to building more homes” despite labor costs remaining high and the difficulty in finding labor.
However, Ed Brady, CEO of the Home Builders Institute (HBI), says the sector is not close to solving its labor shortage.
“I still call it a crisis. You could say that it softened a bit, just like the entire labor market,” Brady says. “If you consider 250,000 empty jobs, and about 70% of those are skilled trades, you are still talking about 180,000 empty positions that people are looking for. [You can have conversations about] the magnitude of the crisis versus whether it’s a crisis or it’s improving. [But] it’s still bad.”
With the expectation of more robust single-family construction and remodeling markets in 2025, the structural labor shortage will impact the industry in 2025. Increased efforts to recruit and train skilled workers and unemployment trends are tailwinds to the effort to bridge the labor gap.
“[But] over the decade, we still face a persistent labor shortage. So, the efforts to recruit and train and retain workers in the residential construction sector need to continue,” Dietz says.
While enrollments and applications for the HBI’s programs related to skilled labor training are increasing, the labor crisis will not be solved overnight.
“It takes years to train the skilled labor market. If you go into [the trades] today, it is going to take five years to get to where you are really efficient and you maximize productivity,” Brady says. “So, this cycle slowing a little bit today and a softening of the labor market give no cause to slow down on feeding people into the industry at entry-level, pre-apprenticeship, [and] introductory level because it’s going to take years to get to that productivity level that we are losing.”
Brady says while the percentage of construction laborers aged 25 or younger has increased to 11% of the workforce, productivity for the sector will likely go down before it goes up because of the knowledge and experience being lost by the workers aging out.
“The workforce is still aging faster than it is bringing people in. The cause of that has been the 20 years that we haven’t recruited and invested in people entering the industry,” Brady says.
The industry has several tailwinds for attracting the younger generation, including the rising costs of four-year colleges. However, Brady says it will take years to overcome the negative cultural perceptions of forgoing college, starting with messaging from high school counselors, educators, and parents. The level of dialogue emerging on the living and career individuals can cultivate in the trades is encouraging, according to Brady.
“One of the challenges we have to overcome is we need to start this [messaging] in the third, fourth, [and] fifth-grade levels. By the time people are influenced in those middle school years, they are building where they want to go. We need to entice [individuals] to learn more about construction at a younger age,” Brady says.
Regulatory Environment and Political Atmosphere
During the 2024 presidential election run-up, housing emerged as one of the top-tier issues discussed by candidates from both parties. Dietz says this was a “small win” for the industry, and that it was the first time housing had such a prominent place in the political discussion in his career.
“It’s good that policymakers are talking about it,” Dietz says. “The other positive development is that when policymakers of both political parties are talking about the housing affordability crisis and lack of inventory, they are addressing the supply side.”
Dietz says demand-side solutions have been the policy go-to in the past, which has proven either “ineffective or counterproductive.” The recognition that the primary way to improve housing affordability is to build more housing is a welcome change.
“I think we are in a situation where both political parties have now correctly diagnosed the problem in a way that my team of economists have been saying for a decade,” Dietz says.
Dietz says at the state and local levels, the most important issues in 2025 and moving forward will be zoning-related. He says discussions are beginning to happen on a local level across the country about small lot, single-family zoning, and the development of skilled labor programs to ensure the construction sector can scale as needed to deliver housing.
During Lennar’s recent earnings call, executive chairman and co-CEO Stuart Miller highlighted the positives from mayors and governors recognizing the local implications of the housing shortage.
“Many have been pounding the table about the need for affordable housing, attainable housing, and workforce housing in their markets,” Miller said. “Awareness has begun to give way to the first signs of action.”
“What has me most invigorated is the fact that what we’ve been hearing from mayors and governors is starting to reflect in the national narrative,” Miller said. “And the fact that the nuanced programs are not perfected yet, but the discussion is starting to activate thinking as how do we get better and build a healthier housing market.”
