Key takeaways
Rising home values and persistently higher interest rates continue to present challenges for the housing market.
In January 2025, new and existing home sales activity slowed compared to the prior month.
REIT performance benefited year-to-date from declining interest rates.
In January 2025, existing and new home sales activity slid despite solid housing demand. “Elevated interest rates remain an issue that’s continues dampening housing activity,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. Average, 30-year mortgage rates in February 2025 showed modest improvement but remain well above pre-2022 levels.1
In January 2025, existing home sales declined 4.9% compared to December 2024, maintaining an annualized sales pace of just over 4 million homes. That figure is considered historically low. January’s setback followed three consecutive months of existing homes sales improvement. One encouraging sign was that sales rose 2.0% from year-earlier levels. Haworth attributes some of January’s activity decline to extenuating circumstances.2 “We had cold weather in the southeastern part of the country and the aftermath of the tragic wildfires in Los Angeles, and those probably contributed to disappointing sales activity.”
“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.
Existing home inventory rose to the equivalent of a 3.5-month supply, according to the National Association of Realtors.2 Lagging existing home inventory has contributed to persistently high home prices. “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 on the market.”
January 2025 new home sales fell as well. According to estimates of January activity, new home sales declined 10.5% from December 2024 and were 1.1% lower than a year earlier.3 But Haworth also notes that homebuilder sentiment, a possible indicator of when supply might expand, is negative.
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.
Mortgage rates are typically higher than yields on the benchmark 10-year Treasury note, but Treasury yields declined beginning in late January. “Today’s mortgage rates reflect bond market yields, 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. “We’re not seeing excessive investor demand for mortgage-backed securities, so spreads between 30-year mortgage rates and 10-year Treasury yields aren’t compressing.” In February 2025, the spread narrowed modestly but remains above average.
By mid-summer 2024, home prices, as measured by the Case-Shiller home price index, reached all-time highs. However, from August to December, home prices fell. Despite five consecutive down months, the index’s downturn was minimal – declining only about 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 $2,750, just shy of the all-time high.6 “The combination of elevated mortgage rates and higher home prices means that housing affordability remains a meaningful problem,” says Haworth.
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 February 2025, with REITs gaining 4.14% year-to-date compared to 1.44% for the S&P 500.7 “Year-to-date strong REIT performance is mainly due to recent interest rate declines,” says Haworth. “If rates stay low, that provides some long-term REIT benefit, but it’s not clear yet that conditions are right for a sustained REIT recovery.”
Be sure to consult with your wealth management professional to determine when and how real estate investments might be a good fit for you.
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 December 2024, housing prices modestly declined.5 Still, homebuyers must deal with dual challenges of persistently elevated mortgage rates and still lofty 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 Haworth. “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.
As interest rates change, learn what the ripple effects across capital markets may mean for investors.
Investing in a real estate investment trust (REIT) is a way to diversify your portfolio. Here's a look at how to invest in REITs and diversify your portfolio into residential and commercial real estate.
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.
