Fannie Mae's 2025 forecast turns bearish

The increase in mortgage rates since the September Federal Open Market Committee meeting left Fannie Mae economists more cautious about the housing market in 2025.

Fannie Mae significantly slashed its existing home sales forecast to a gain of just 4% next year from the previous 11%.

Furthermore, it no longer expects mortgage rates to sink below 6% next year. Its outlook for this year's fourth quarter is for an average of 6.6%, up from 6.5% in October.

That is a significant revision in comparison to October's call for rates to be at 6% in the final three months of the year. The 30-year fixed rate average will moderate over the next four quarters, but only drop to 6.3% by year-end 2025, and to 6.1% by the final quarter of 2026. It previously expected rates to average 5.7% next year.

Since the September FOMC meeting, the 10-year Treasury yield has been climbing, closing at 4.41% on Nov. 20, a gain of 82 basis points. "Some of the upward movement may also be due to market expectations of more expansive fiscal policy following the results of the 2024 election, as well as general heightened policy uncertainty," an accompanying blog post said.

The 10-year yield actually increased 16 basis points from the time Fannie Mae made its initial interest rate projections for November until it put out the information, creating upside risk to its forecast, the blog said.

"To the extent that the recent run-up in rates has been driven by market expectations of stronger economic growth, we think this bodes well for the labor market outlook and home purchase demand," Mark Palim, chief economist, said in a press release. "However, we expect inventories of homes added to the market, and therefore sales of existing homes, to remain subdued through next year, as the higher mortgage rate environment is likely to strengthen the ongoing lock-in effect."

Total volume for this year is forecast to be $1.64 trillion, slightly lower than October; since the primary periods for originations have passed, that likely moderated the reduction.

Purchase will make up under $1.3 trillion, similar to last month's projections.

It pulled its 2025 outlook down to $1.94 trillion from $2.14 trillion a month ago. Refinancings next year are now predicted to be $527 billion, versus over $600 billion previously, also a casualty of higher than expected mortgage rates.

Gross domestic product is expected to grow by 2.4% this year and 2.1% in 2025.

Fannie Mae made its first 2026 projections, with GDP growth of 2.2%, with total mortgage origination volume of $2.4 trillion.

This year's total home sales will be 4.71 million, versus the previous 4.77 million. It cut 2025 home sales expectations down to 4.93 million from 5.24 million. But by 2026, home sales will rebound to 5.68 million.

Fannie Mae released its forecast the same day the October existing home sales were disclosed, noting the September rate dip led to increased activity during the month.

How those competing forces in the market balance out is an open question, Palim said, "but for now we continue to expect affordability to remain the primary constraint on housing activity through our forecast horizon."