White House, Fed warn housing costs could impact inflation in 2025

During the COVID-19 lockdowns, renters and buyers benefited from an uncertain housing market. Mortgage rates were at historic lows for buyers, and landlords slashed rents considerably to entice renters to renew leases and draw in new business.

However, the years following the lockdowns have seen a massive surge in rental costs, mortgage rates, and new home prices, undoing the momentary financial relief for consumers.

Now, consumers are left managing much higher costs of goods and housing as wage growth stagnates.

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When inflation skyrocketed in 2022, housing costs also rose. Home prices and rent are important factors of core inflation and have remained high despite the cooling of overall inflation levels.

Increased housing costs are not only frustrating for home buyers and renters but also contribute to stubborn inflation.

The White House and Minneapolis Federal Reserve Bank predict that inflated housing costs will likely continue next year.

A young family is in their newly purchased home. Though inflation and mortgage rates have been sticky, 2025 may bring some change.

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The rising cost of housing is keeping inflation high

The November Consumer Price Index (CPI) was released this month, and the results were mixed.

Inflation ticked up to 2.7%, straying further from the Fed’s year-end target of 2%. Shelter inflation — the cost of housing for renters and homeowners — also rose 0.3% but indicates a slight improvement from October.

The White House recently released an update on housing inflation, noting that limited inventory is driving rising housing costs. Shelter inflation peaked at 8.3% in April 2023 but remains elevated at 4.8%.

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Though rental growth rates have eased from their peak in June 2022, it is not enough to bring down inflation levels; shelter inflation alone accounted for 40% of November’s CPI increase.

The Minneapolis Fed estimates that stabilized rent prices will take at least another year to translate into a lower impact on inflation. Shelter inflation will remain above pre-pandemic levels through the end of 2025.

Consumers feeling squeezed by the mounting cost of living may not find relief in the coming months, but the end of the year looks more promising.

Fannie Mae predicts housing market ‘lock-in effect’ for 2025

Housing affordability is a significant aspect of the housing market, as it determines when and where buyers choose to house hunt. Rising median home prices and mortgage rates have created a barrier for first-time home buyers, effectively stagnating market activity.

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Fannie Mae has dubbed this phenomenon the ‘lock-in effect,’ indicating buyers and sellers are stuck in gridlock.

Keeping that in mind, they’ve released a few key predictions for the 2025 housing market:

Mortgage rates will decline but remain above 6%.New home sales will drive market activity.Housing prices will increase, but price growth will slow.

Mark Palim, Chief Economist at Fannie Mae, notes that 2025 will remain challenging, but offer a few areas of opportunity.

“We foresee the current affordability crunch hampering activity through our forecast horizon but expect nominal wage growth will outpace home price growth for the first time in more than a decade in 2025, slowly but surely providing some much-needed relief to potential homebuyers,” he said.

“Heightened mortgage rate volatility may present opportunities for would-be homebuyers to take advantage of temporary lows, and we may see stretches where housing activity is boosted by lower rates — but, on average, we expect mortgage rates to remain elevated and a hindrance to activity.”

The 2025 housing market may be a mixed bag. Persistent inflation and elevated mortgage rates will likely make conditions tricky, but buyers who have been waiting on the sidelines will have opportunities to strike while the iron is hot.

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