By Syndie Eardly
On the strength of a growing economy and softening inflation in 2024, real estate sales looked promising coming into 2025. But burgeoning economic instability has dialed back expectations for both economists and consumers.
In May, the World Economic Forum released the Chief Economists Outlook, noting the volatility fueled by tariff wars is likely to have long-ranging effects.
“The chief economists were largely aligned in their assessment that higher tariffs and persistent trade tensions would fuel inflation and suppress trade volumes,” the organization reported.
The effect, according to the International Monetary Fund, is that advanced economies – specifically the U.S. and European countries – are likely to experience only modest growth at 1.5% in 2025 with little improvement expected in 2026. Emerging markets and developing economies are anticipated to lead the world with 4.1% growth, with overall global growth to remain in the 3% range for the near future.
Given the uncertainty, the U.S. real estate market is facing several headwinds as the 2025 market winds down and we head into 2026.
Consumer confidence
Economic instability has taken a toll on consumer confidence, with the numbers plummeting in April, according to The Conference Board. Although there was some improvement in July, confidence remains low in significant areas.
“The Expectations Index – based on consumers’ short-term outlook for income, business, and labor market conditions – rose 4.5 points to 74.4,” the organization reported in its July 29 Consumer Confidence Index. “But expectations remained below the threshold of 80 that typically signals a recession ahead for the sixth consecutive month.”
The Conference Board also noted that consumer appraisal of current job availability weakened for the seventh consecutive month, reaching its lowest level since March 2021, a sentiment which tracks employment conditions on the ground.
Job growth has diminished dramatically over the past several months, with new jobs averaging only 97,000 per month so far this year, half that of 2024, which posted an average of more than 180,000 jobs per month.
Consumer jitters are also likely to impact GDP, according to Reuters, which report that personal consumption expenditures are slowing sharply.
“Personal consumption expenditures in the second quarter grew by only 0.9%, the slowest pace since the pandemic,” the news agency noted. “And in real terms, consumer spending has completely flat-lined in the first half of the year.”
Affordability
The National Association of Realtors reported in August that June housing market activity was slow largely due to affordability issues, with the median existing-home price reaching an all-time high and marking the 24th consecutive month of year-over-year price increases.
NAR highlighted in the brief report that local markets are attempting to increase construction of affordable housing by issuing more building permits, but it is unlikely to address the long-term systemic issue of housing affordability.
Recent studies have pointed to a larger issue; that lower- and middle-income households are unable to afford even the most modest construction due to their reliance on low wage jobs. The value of that moderate income has been eroded further through inflation, as the cost of goods, services and housing continue to escalate faster than wage growth.
While local housing assistance programs and affordable housing construction can help to some extent, until income disparity is addressed in a broader societal context, homeownership may remain out of reach for a growing percentage of the U.S. population.
Interest rates
In the July MBA Forecast Commentary, economists Mike Fratantoni and Joel Kan forecasted interest rates to end the year at 6.7%, moderating only slightly in 2026 to 6.4%.
“If the economy does enter recession, mortgage rates are likely to drop faster than in our baseline forecast, which would push up refinance volume, but would lead to a sharper increase in the unemployment rate, which would slow the purchase market,” they noted. “Alternatively, if the tariffs result in stickier inflation rather than just being the result of a one-time price increase, the rate path could go higher, leading to fewer refinances.”
Given the uncertainty ahead, they adjusted their 2025 origination forecast as follows:
- Total origination volume is expected to increase to $2.02 trillion
- Purchase originations will reach $1.4 trillion compared to $1.3 trillion in 2024
- Refinance originations are expected to increase to $664 billion from $491 billion
As inventory continues to improve, Fratantoni and Kan said home price appreciation is likely to slow to one percent by the end of 2025 with home prices remaining flat in 2026 and 2027 as demand slows.
Inflation
Inflation may be the key to what happens next for the real estate market.
The CPI readings for June showed a slight pick-up in inflation, with inflation increasing to 2.7 percent compared to the same month a year ago, the highest growth rate in five months, but below the anticipated 3%+ range.
The slower-than-expected pace of inflation provided some hope that while the tariffs may have a temporary impact on inflation, eventual moderation may open the door for the Federal Reserve to provide some much-needed interest rate relief for the market by 2026.
Given the uncertainty ahead, examining how all of these factors intersect with and apply to the local economy will help real estate agents, loan officers and title companies improve their ability to forecast and prepare for their own local market opportunities.
