MBA Chief Economist Offers 2025 Mortgage and Housing Forecast at MSR Webinar

Global uncertainty, fiscal sustainability and shifting market dynamics will shape the economic landscape and mortgage demand in the year ahead, according to Michael Fratantoni, Ph.D., Chief Economist for the Mortgage Bankers Association (MBA). He recently provided a comprehensive forecast during the January 2025 MSR Monthly Snapshot Webinar, hosted by SitusAMC. Here are seven key trends to watch. 

Global Uncertainty and Its Impacts 

“This is certainly an interesting time, with a high level of uncertainty about any number of things, whether political, geopolitical or economic,” Fratantoni said. Key challenges include ongoing geopolitical tensions, a stagnant European economy and China’s struggling real estate sector. Many countries are still grappling with inflationary pressures following the Covid-19 pandemic. While central banks worldwide have aggressively reduced short-term interest rates after raising them, the U.S. Federal Reserve has been more cautious, contributing to the complex financial environment. 

U.S. Inflation and Employment  

The U.S. economy has demonstrated resilience, maintaining growth above 2% from 2022 through 2024. However, Fratantoni forecasts a slight deceleration in 2025 due to weaknesses in the manufacturing sector. “Data from the Institute for Supply Management is showing growth in a few sectors on the services side of the ledger, and that kind of divergence is hard to maintain,” he explained. 

Inflation is improving but remains above the Federal Reserve’s 2% target. Core inflation rose modestly by 0.2% in December 2024, and the MBA anticipates inflation reaching the Fed’s target within the next 12 to 18 months. The labor market, meanwhile, remains strong but is evolving. December 2024 saw a robust increase of 256,000 payroll jobs and an unemployment rate of 4.1%. The MBA expects the unemployment to rise closer to 4.5% by the end of the year.  

“In 2025 we're not seeing huge layoffs, but employers much more cautious about hiring, which is likely to lead to further increases in the unemployment rate over time,” Fratantoni said. “With that slower hiring rate, the typical length of unemployment is getting a little bit longer. So it’s not like a ton of folks are losing jobs, but if they do, it's harder for them to get back in the job market. And it's tougher for those recent grads to find a position.” 

The Fed, Bond Vigilantes and Interest Rate Trends 

The Federal Reserve’s cautious approach to monetary policy was a focal point of Fratantoni’s analysis. Following a cumulative 100-basis-point (bps) cut in 2024, the MBA now predicts only one additional 25-bps cut in 2025. A mixed inflation outlook and relatively strong labor market may persuade the Fed to hold off on further rate reductions. 

In addition, Fratantoni discussed the resurgence of “bond vigilantes”—investors who influence governments to adopt fiscal discipline by pushing up long-term interest rates. With the U.S. debt-to-GDP ratio near 100% and projected to rise further, fiscal sustainability is a growing concern. This has led to a steepening yield curve, with long-term rates climbing despite reductions in short-term rates. The MBA forecasts a 10-year Treasury yield averaging 4.5% in 2025 and a more stable mortgage rate environment for homebuyers. 

September 2024: A Reminder for Originators 

With interest rates expected to fluctuate in a wide trading range, adaptability will be crucial for capturing opportunities, Fratantoni said. He emphasized the significance of September 2024, when the Fed’s rate cut spurred a surge in mortgage demand. This event underscored the need for originators to remain operationally agile and prepared for sudden shifts in market conditions.  

“You’ve got to be up on your toes and anticipate a couple of these kind of events over the course of 2025,” he advised. “It’s hard to know when they're going to happen, but have an operation that's ready to catch the ball when it's thrown to you.” 

Immigration Policy and Construction Costs 

Changes in U.S. immigration policy under the Trump administration are anticipated to impact the construction industry significantly. Tighter immigration policies could exacerbate labor shortages, driving up wages and, consequently, construction costs. This dynamic may contribute to upward pressure on home prices, compounding affordability challenges. 

Housing Inventory and Appreciation 

The U.S. housing market continues to grapple with inventory constraints. While builders have ramped up construction, the lock-in effect—where homeowners hesitate to sell due to low existing mortgage rates—persists in some regions. However, Fratantoni noted improvements in inventory levels, particularly in markets such as Texas and Florida. These trends support MBA’s forecast of a 5% increase in existing home sales and a 10% rise in new home sales for 2025. 

“The underlying demographic demand is there, even at this level of mortgage rates,” he said. “This has been a supply-constrained market for years. That's not going to go away.” However, a surge in multifamily completions is flattening rent growth, potentially encouraging some younger households to delay homeownership. 

Home price appreciation is expected to moderate, with national growth projected between 1.6% and 2.4% annually over the next three years. This reflects improved inventory levels and headwinds from a softening labor market.  

Mortgage Applications and Production Profit Margins 

Mortgage origination volume is projected to reach $2.1 trillion in 2025, driven by a purchase-dominated market. The addition of inventory will support increased transactions, though two-thirds of homeowners remain “out of the money” for rate-and-term refinances. Cash-out refinances will account for a significant share of activity as home values rise modestly. 

Profitability for independent mortgage banks (IMBs) remains under pressure. While some profitability returned in late 2024, margins are well below historical averages. Fratantoni emphasized the importance of seasonality, noting that volume is likely to peak mid-year, while the first and fourth quarters will remain challenging. Continued consolidation within the industry is anticipated as lenders seek strategic partnerships to navigate tight margins. 

View the recording of Fratantoni's presentation here and download the slides here. Register for the February 2025 MSR Monthly Snapshot Webinar here. For more information on SitusAMC’s Valuation, Analytics and Hedging services, visit our website.