Prominent real estate economist Matthew Gardner shares his predictions for the housing industry in 2025 with Agent Publishing co-founder and Publisher Anne Hartnett.

Transcript: 

Anne Hartnett: I’m Ann Hartnett with Agent Publishing, and it’s my pleasure to welcome Matthew Gardner for our 2025 Real Estate Predictions feature. Matthew Gardner is a prominent real estate economist. His housing forecasts are relied upon by Reuters for their U.S. housing market forecasts, and by Fannie Mae for their home price expectations survey. He also sits on the Washington State Governor’s Council of Economic Advisers and is an advisory board member of the Department of Real Estate Studies at the University of Washington.

Thanks for joining me today, Matthew, and you are always welcome. Good to see you again. 

Matthew Gardner: You as well. 

Anne: I’d like to start out with what I think a question that’s on every real estate professionals mind. What impact will a second Trump presidency have on residential real estate? 

Matthew: Yeah, as you can imagine, it’s a question I’m being asked an awful lot, and I’m afraid there is no easy way I can answer it. But let’s break it down into a couple of the bigger things, or issues out there that would have an impact on the residential market and indeed on residential brokers. No. 1 is his goal of deregulation. Now … two different things, one of which is he’s being told by builders there’s no land to build on. And so he is looking to potentially open up federal land for development. Now my opinion on that is somewhat mixed. In general, I don’t really think it’s going to have much of an impact because most federal land, quite frankly, is so far away from infrastructure, so far away from our job centers. I think it’s somewhat meaningless. I don’t see it having a big impact at all. So I’m not seeing that as being an issue which is going to come up potentially that’s going to solve our problems. Secondly, more interestingly, would be removing barriers to development. Now, this is actually good. We all know regulatory fees are out of control.

However, I think it’s way too early to say whether there will be significant reform actually put in place or not. And that’s going to depend very much on who the HUD secretary ends up being, as well as who’s made director of the FHA, the Federal Housing Finance Authority. That is, of course, assuming both of those departments still exist. So I think that that in theory, is a good thing. But I’m not going to hold my breath, because I think there’s a long way to go before we start seeing that implemented in any tangible form. Tariffs. Now, this is a big thing. And certainly the applications to housing are massive. He’s proposing up to a 60% tariff on Chinese goods, a 10 to 20% tariff on all other imported goods. Now, that is problematic for a number of reasons. One of which, the biggest one in general, all U.S. economists agree that that would be inflationary. That’s not a good thing. But the impact on housing would be significant, given that 32% of the materials used to build a home are imported from somewhere outside of America. Home builders will see their costs rising.

They’re going to have to push that on to the end user, onto the homebuyer. That’s going to force prices higher. Immigration for we all know it’s been talking about that. They’re looking to launch the largest deportation program in American history. Now, this is not only inflation. We in general. I say that because, think about food costs. Because people have to go out first, pick those, those products that produce. Those costs are going to go up. This can hit the housing sector because immigrant labor, well, that accounts for 31% of the construction workforce. We’ve got few enough people going to vocational school as it is. We take away more workers, but again, it’s going to force prices higher.

And finally, probably the most important one would be what impacts will we see on mortgage rates. Well, we know that we’re going to increase our deficit spending. It’s going to be a big thing by extending tax cuts and a lot of other reasons as well. Now, more spending means more debt. That debt under itself has to be financed. Now that’s going to lead bond yields to rise. And that obviously does hurt mortgage rates because they will have to, maybe, rise as well. Now, moreover, if we do see inflation kicking in, the Federal Reserve, they’ve been reducing the Fed funds rate. Mortgage rates don’t rely on it, obviously, on the Fed funds rate, but they are influenced by it.

And so if we see the Fed slow down, stop or even potentially reverse, reducing rates, if we start to see inflation igniting again with that again, we’ll have a knock on impact in terms of mortgage rates. So I think all in all, I’m not going to hold my breath. I think it’s a lot of bluster. And we all know the president and the last administration under his administration said a lot of things to try and get people to agree to other things before having to implement tariffs. So I will wait and see. But I think there’s some potentially OK things coming out of it. And that would be in the form of looking at that regulatory burden on builders. But I think there’s a lot more negatives potentially than there are positives when it comes to interest rates. 

Anne: It seems everyone predicted rates would fall earlier faster in 2024. Do you see that happening in 2025?

Matthew: I’m afraid you’re absolutely right. Economists and pretty much most economists, and I can’t say I got it right, but, they were expecting them to fall a lot more than, quite frankly, I was. Now, why was this? Well, for the most part, they got their forecasts wrong, primarily because they believed I didn’t, that they did, that we were actually going to see a recession occurring, during 2024. And so if you see a recession, what tends to happen is that money moves out of equities into bonds. And that actually is a positive that allows mortgage rates to drop. But as I had predicted, we weren’t going to get a recession. We didn’t. And therefore rates stayed higher. We didn’t see that drop because of a significantly slowing economy.

But there was something else that we all, including myself, did get wrong. And that was, looking at lenders and how they were going to front load their fees … generally speaking, the 30-year fixed-rate mortgage, it’s calculated by adding the yield or interest rate on 10-year treasuries, to a premium, because there is obviously some risk associated with that mortgage now. So you take the yield on 10-year paper, add on 1.7-1.8%. That should be where the mortgage rates are. However, the spread right now is a full percentage point higher than that. So what’s going on? Well, that one is keeping rates higher than, quite frankly, they should be. But they’re doing it. And banks are doing it because they believe, as I do, that ultimately rates will drop

And when that happens, people who have bought homes at a higher interest rate or higher mortgage rate, they will refinance. That lender will lose that revenue. So they’re trying to get as much money upfront as they possibly can. So I think that in general, if I look at where we are forecasting rates to be, again, all of us, including myself, are saying that yes, we do expect them to be lower by the end of the year than they are today, but we’re not going to be down in the threes.

So in my opinion, even the fives, I think we’re going to be probably knocking around 6%, better than where we are today, but certainly not as low as mortgage brokers, real estate brokers or indeed homebuyers would like to see listing activities very much tied to rates. 

Anne: Are we still going to see low levels of activity? 

Matthew: You’re absolutely right, and why I say so, quite frankly, it’s the so-called golden handcuffs that households have because of the historically low mortgage rates we saw a couple of years ago where people either bought a new home at those low rates or refinanced their existing homes, and that’s going to make it remarkably difficult for anyone thinking about selling … what I expect to see next year is that, as I mentioned earlier, I do expect to see rates come down. Now, home sellers, they’re not going to demand they get exactly the same rate for that new home as their existing home. But as rates drop, once you get to within about a point where one, two, one-half percent of where some of these mortgage rates today, well, then, it’s less of a burden to say, no, I have to stay in my house.

We are still seeing sales occur for three of the four reasons that we normally do. One of which is job change, two is death, and three actually is divorce. But what we’re not seeing is the fourth D, and that is discretionary, the choice to move. But as rates come down, I believe that we will certainly see that improve somewhat. But that, here’s the problem, nationally, the latest data suggests that 74.6% of owners of single-family homes have a rate at or below 5%. So that’s two percentage points from where we are today, but more importantly, 21.6% have a rate at or lower than 3%. So I think we’ve got a long way to go for inventory levels rise to anything that’s close to the long term average

Anne: Well, that brings me to home prices. And it sounds like they’re going to continue to rise due to lack of inventory and rates. 

Matthew: Yeah, I think so. And I think that we will see rates here, rise nationally, but at a more, more tepid pace. We’ve been talking about affordability a lot nationally, and everyone has just been questioning, how have prices been able to go up as mortgage rates were going up as well? But they have now … In the third quarter of this year, the U.S. added about 1.8 million new households, and of that 1.8 million, just over 650,000, were new owner households. Now that’s about the historic norm of two-thirds of us owning our homes, one-third renting. So I think we’re going to create more demand for ownership housing. So there’s no doubt that’s going to occur. But the question is going to be, are we going to see the supply? The demand is going to be there, sure. The supply, I think it’s still going to be, quite frankly, a tight market. So go back to your early college class, economics classes, when you have high demand and low supply, what happens? Surprising. It continues to rise. And I think that’s going to be the case now in 2025. My friends at the National Association of Realtors, they’re forecasting prices rising by about 2%. Mortgage bank to association, Wells Fargo, they’re a bit more bullish. They are, I think somewhere north of I think it was at 4.3. 

S0 yeah, a good number. I’m slightly more pessimistic. I think we’re going to come in below four, somewhere between 3.5 and 3.9%. So we often see those prices at least give us analysts a rate rise. But it is going to be at a more tepid pace because we just have to try and get back to that relationship between incomes and housing prices.

Anne: There still seems to be a general lack of new home construction affecting supply. Do you see any increase in new construction homes or condominiums? 

Matthew: I wonder, as far as single-family homes, I’d be surprised to see housing starts next year higher than we saw in 2024. And my forecast was just over a million starts this year and very slightly lower. But not much, but certainly not increasing in 2026. Now, in general, why is this? The reasoning is that, in terms of the new single-family market, there is a lot of existing standing inventory that builders have right now. There’s about 480,000 or so new homes on the market. Now, that’s the highest level of supply since just after the housing bubble burst in 2008. So it’s going to take some time for those supply levels to fall enough. That’s going to encourage builders to break ground on new product, though. But that’s not the only reason. I mean, sale price is certainly flat year over year. And that’s in the new construction market. Not surprising, given where supply levels are, but construction costs continue to rise.

That, again, makes it very hard for builders to make that decision to build a new home, given that it is still remarkably expensive. So I think that new home sales will rise to about 760,000 next year, from 694,000 this year, and that’s reflective of the confidence that builders are showing right now. The market is going to get better, but they’re looking to break new ground on new products until a lot of the existing supply gets absorbed by the marketplace. And on the condo side, certainly if you think about the high-rise market, that’s going to vary obviously, by region, but it is very expensive to build high-rise condominiums. So if you think about it in those terms, how deep is that market right now? We’ve got a huge supply of apartments that’s going to start winding down over the next couple of years.

I would be surprised to see a big push, at least nationally, in terms of condominiums, at least until we see financing costs drop down for mortgage rates as well as builders’ cost to borrow funds in order to build. So I think there are certainly some headwinds for builders. Sales will be up next year, but I just don’t see new starts rising at all.

Anne: Do you think we will continue to see builders offering mortgage rate buy downs? 

Matthew: Probably. Yeah. But their use of incentives has started to taper. Right now about 60% of builders are using incentives in some way, shape or form. That’s down from 62% in October and 64% back in August. However, I think it’s gonna be hard for them to continue to do this given the way mortgage rates are. They expected the rates would fall. That would make those mortgage rate buy downs a bit easier for them to take and sell on those loans. That is not the case now. So I would not expect to see them increasing, above the level that we see today. But I don’t expect to see them disappearing completely either. So I do expect to see builders offering very significant incentives, if only to get rid of the existing inventory.

Anne: Housing affordability is especially concerning for the first time buyer. Is there any relief on the horizon? 

Matthew: Well, that’s going to be very much dependent upon mortgage rates, obviously. I mean, in October, I think that nationally, the principal interest payment for some who bought a single-family home. Well, that rose about 2.8%. That’s just over 3% month over month versus September, even though we actually saw mortgage rates drop. And so, I think what we are seeing in the market today is that it’s going to be hard because I don’t expect to see a systemic price correction on the downside. But the biggest issue is going to come, in the form of first-time buyers, the problems we have with them.

Now, think about the numbers, make some assumptions, that they were buying at a median price home, nationally, limited low down payment, let’s say 3.5%. Well, they would have to be making just shy of $78,000 in 2021. Mortgage rates were remarkably low. But today, well, they’ve got be making more than $125,000. That’s up 61% in four years, less than four years.

So, I think the less they’ve seen their income increase that much, which I pretty much guarantee it hasn’t. It is going to be very, very hard. So housing affordability is something, anywhere. In fact, quite frankly, across the country, it’s something that I’m hearing elected officials both at the federal, state and local level talk more about the affordability issues they have.

I’ve had more conversations about that in the last two years than I’ve heard in the last 25 years. So at least we are hearing politicians talk about it now, whether talk can be translated into action, well, we will see. But I think it’s something which is front and center on a lot of people’s minds now. And it’s unsurprising. It is a very, very significant problem, not just on the coastal markets, but quite frankly, in the Ohios and the Iowas markets as well.

Anne: All right. Matthew, my last question. When it comes to real estate housing, what will 2025 be remembered for? 

Matthew: I think that, well, what I would say to selling to the brokers listening to this is well done. You made it through 2023, which was a horrible year in terms of transactions. 2024 was modestly better. Not much. Still the second worst year since the early ’90s nationally. But I do expect that we will see some further improvement, in terms of the number of transactions occurring in 2025. So sales will rise beyond where you are, probably somewhere between 5 and 10%. I think it’s something which is going to be a good thing. So the market’s not going to be where we want it, but it’s better than it was. 

Prices. There are still people out there, the doom, gloom and despondency group who say, you know, prices have got to collapse, mortgage rates have skyrocketed. Price still going up. Ultimately the big drop, the housing bubble 2.0 will occur. Well, they’ve been saying that for years. That’s not happened. I’m afraid it’s not going to happen in 2025 either. Prices are going to go up but at a more modest pace. We’ve seen the last couple of years, but no systemic declines. A couple of markets that really saw massive increases, through COVID, the Austins, Salt Lake City, Boise, this well, now they’ve already seen some price corrections, and I think that that will continue. But the bigger picture is no massive countrywide declines. Just more modest price growth. 

Yeah, I would say that we could see in many markets, certainly those that have a fairly extensive urban, not much labor force, but, business, workplaces that will see some improvement in demand for urban condominiums as we’ve seen more companies require their staff to return to the office. Some companies honestly, Amazon is one, here in Seattle, already making those decisions. I think others across the country are starting to formulate those plans. Now. What that will mean is that if people have to come back into the office more frequently than they currently are? Well, then I think you’re going to see some more interest in urban condominiums, which quite frankly, have been beaten up price wise. So we’ve seen significant downside price corrections in many cities. I think there’s opportunity there for you to get in, buy low, and, over time, you will likely see annualized price growth above the suburban markets within those cities. So, I think that a rebound in urban condominiums is something I’d expect to see as well. But those are three things — sales rising, prices up and no collapse, and a rebound in urban condos. Those are three things I expect to see sticking out in 2025 and some of the bigger stories that we’ll be reading about. 

Anne: Thank you so much, Matthew. It’s always a pleasure to hear your insights. 

Matthew: Likewise, and thank you so much for inviting me.