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Key takeaways
Rising home values and persistently higher interest rates continue to present challenges for the housing market.
Despite these headwinds, existing and new home sales ticked higher in December.
REIT performance suffered in recent years but started 2025 with a modest recovery.
While housing demand remains strong, homebuying activity throughout 2024 was down, owed primarily to affordability issues tied to rising home prices and higher mortgage rates. Average, 30-year mortgage rates in 2025 continue to hover near 7%, lower than 2024’s peak levels, but well above pre-2022 levels.1
Home sales up at the end of 2024
December’s existing home sales jumped 2.2% from the prior month, marking the third consecutive monthly uptick. It represented the strongest month for existing home sales since February 2024.2 “It’s encouraging news,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “From a historical perspective, however, housing activity remains low, but the latest data indicate that the market isn’t deteriorating.” Notably, on an annual basis, existing home sales in 2024 fell to the lowest level in nearly 30 years.2
Lagging existing home inventory remains a concern. “Higher rates are making people in homes financed with low mortgage rates reticent to move,” says Haworth. “The challenge is we ultimately need more homes.”
December new home sales also trended higher. According to estimates of December activity, new home sales rose 3.6% from November and were 6.7% higher than a year earlier.3 But Haworth notes that homebuilder sentiment, a possible indicator of when supply might expand, remains relatively neutral.
One problem, according to Haworth, are market uncertainties as new Trump administration policies emerge. “There’s a lot we don’t know about how, in the next 3-6 months, various policies might impact the labor market, interest rates and building supplies,” says Haworth. For example, possible immigration crackdowns may reduce the construction labor force. Tariff policies could impact building supply costs. Interest rates could potentially adjust higher if inflation again becomes a major issue. “Additional supply pressures will result from the significant rebuilding required in the Los Angeles area following the damaging fires in that region,” says Haworth.
Despite recent improved activity, “the housing market is pretty much range-bound in the present environment,” says Haworth.
Why are mortgage rates rising?
“Today’s mortgage rates reflect higher yields in the bond market, but also a relatively wide premium spread between 10-year U.S. Treasury notes and mortgage rates,”4 says Haworth. “Part of that is due to the Federal Reserve (Fed) continuing to trim its holdings of mortgage-backed securities.” Haworth says that reduces market liquidity. “Major tightening in the 30-year mortgage to 10-year Treasury spread will likely require a change to the Fed’s current policy of reducing its mortgage-backed securities holdings.” In January 2025, the spread between 30-year mortgages and 10-year Treasuries widened modestly but remains well below recent peaks.
“The combination of rising home prices and elevated mortgage rates means that housing affordability remains a meaningful problem,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management.
Four consecutive months of declining home prices
By mid-summer 2024, home prices, as measured by the Case-Shiller home price index, reached all-time highs. However, from August to November, home prices fell. Despite four consecutive declining months, the index’s downturn was minimal – declining less than 1% from July’s peak levels.5
According to the residential real estate brokerage firm Redfin, the median monthly mortgage payment in January 2025 (based on average 30-year mortgage rates and home prices) was $2,686, the highest level recorded since June 2024, and 7.6% higher than a year earlier.6 “The combination of elevated mortgage rates and higher home prices means that housing affordability remains a meaningful problem,” says Haworth.
REITs off to a good start in 2025
Some investors seeking to enhance portfolio diversification turn to real estate investment trusts (REITs). In recent years, REITs have underperformed. On an average annualized basis for the five-year period ending in 2024, the S&P Developed REIT index gained just 1.59%, compared to 14.53% per year for the S&P 500 index. The environment was more level through late January 2025, with REITs gaining 2.60% year-to-date compared to 2.30% for the S&P 500.7 “REITs market struggles are due to high interest rates,” says Haworth. “However, REITs currently pay income comparable to today’s attractive 10-year U.S. Treasury yields, and REITs may offer a more attractive valuation, so that creates a reasonable diversification opportunity.”
Be sure to consult with your wealth management professional to determine when and how real estate investments might be a good fit for you.
Frequently asked questions
Housing prices fell over a seven-month period in 2022 and early 2023 and housing demand dropped when mortgage rates first began to rise. However, housing prices recovered to new record levels in late 2023. After declining in three consecutive months in late 2023 and early 2024, housing prices recovered beginning in February 2024 and reached new all-time highs in consecutive months from March through July 2024. From August through November 2024, housing prices modestly declined.5 Still, homebuyers must deal with dual challenges of persistently elevated mortgage rates and rising home prices.
The decision to purchase a home may depend on many factors, including your own personal priorities and financial situation. Some people may require a larger living space or have a desire to settle in a specific community. Those priorities may take precedence over the current mortgage rate environment. “Some people will also buy the home that appeals to them regardless of mortgage rate conditions,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “Finding a different home down the line does not automatically substitute for the preferred house you find today.” While in an ideal world, mortgage rates would be more affordable, each potential homebuyer must determine the right time to purchase a house.
Interest rates began moving up in 2022, and mortgage rates followed suit. Today’s mortgage rates are close to double the rates that existed in 2021.1 As a result, homebuyers are required to make higher monthly mortgage payments. This caused some potential homebuyers to step back from the housing market. At the same time, it led some current homeowners who potentially were interested in moving to a different house to hold off doing so, and preserve their current, low mortgage rate. Therefore, housing activity has slowed significantly, attributable primarily to the recent change in the interest rate environment.
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Equal Housing Lender. Deposit products are offered by U.S. Bank National Association. Member FDIC. Mortgage, Home Equity and Credit products are offered by U.S. Bank National Association. Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rates and program terms are subject to change without notice.