Housing market outlook: House price forecast fluctuates again

According to Freddie Mac's latest forecast released Tuesday, home prices are expected to rise 2.1% in 2024 and 0.6% in 2025, marking the latest dizzying turning point for this year in particular.

In April, the mortgage giant said home prices would rise just 0.5 percent in 2024 and 2025, well below its March forecast of 2.5 percent price increases in 2024 and 2.1 percent in 2025.

Freddie Mac did not issue new home price forecasts between April and today, opting instead for a quarterly cadence. This proved prescient, as the dust has only recently settled after major upheavals in the markets and economic data.

A series of higher-than-expected inflation readings in the spring pushed the prospect of Fed rate cuts further and further away, leading to a rise in bond yields and mortgage rates.

But that view changed over the summer, when inflation hit a three-year low, making a rate cut next month seem more certain. And on Friday, Fed Chairman Jerome Powell essentially confirmed that view, saying “the time for a rate cut has come.”

Mortgage rates have fallen significantly in recent weeks and are now approaching the 6% mark, the “magic number” that some experts believe will lead to further easing of the housing market.

Freddie Mac sees a big surge in demand, especially from first-time buyers. However, other aspects of its forecast are more mixed, similar to the sharp upward revision in home prices for 2024 versus a more muted forecast for 2025.

“We also expect lower rates to mitigate the lock-in effect to some extent, leading to some increase in inventory – although this should be minimal given that the majority of existing homeowners have lock-in rates below 6%,” it said. “Despite some easing, tight inventory (due to a decade of construction, exacerbated by the lock-in effect) is expected to continue to constrain home sales.”

The result is likely to be only a modest increase in home sales for the remainder of the year and into 2025, remaining below the 6 million annual rate.

Nevertheless, Freddie Mac remains optimistic overall and does not expect the economy to slip into a recession.

“While potential homebuyers continue to face housing affordability challenges due to high home prices, homeowners are experiencing significant wealth gains that make them less vulnerable to economic adversities,” the report said.