The Economy, Policy And Rates

In terms of its real estate market, the new year is likely to be very similar to the past year in the District of Columbia–at least during the first quarter.

The determining factors in the success or failure of a 2025 housing rebound are primarily mortgage rates, inflation, and employment. Inventory ranks high in many parts of the nation, but Washington DC is experiencing a period of elevated inventory.

Concerns about inflation’s trajectory and unemployment increases are being driven by the proposed policies of the newly-elected President and GOP majority. Until we know which policies will be pursued, and when and how they will be initiated, markets will experience uncertainty and volatility.

Demographics will play a meaningful role in some housing markets as Millennials take their position as the nation’s largest group of homebuyers. But in high-cost markets like the District of Columbia, where even entry-level homes can be prohibitively priced and monthly payments are out of reach with current mortgage rates, this is likely to be less impactful.

These challenges will continue to deter most Washington DC home buyers in 2025. Inventory levels will remain high as a result.

Remote work reductions,workforce reduction, tariffs, tax policies and immigration policies, increases in unemployment, government spending and the deficit may individually, or in combination, produce inflationary consequences in Q2 – Q4. This is expected to have a negative effect on the federal interest rate and FOMC plans for rate reductions.

Increased unemployment tends to result in lower bond yields. When yields are lower, bond value increases and mortgage rates typically lower. But…when inflation expectations rise, lenders respond by raising rates to offset the potential loss in future value. We experienced that from Sept. through Dec. 2024.  So in 2025, if lenders expect the upward inflation trend to continue, mortgage interest rates will climb accordingly.

Primary Concerns

•  Mortgage interest rates above 6%
• Home prices | Affordability
• “Locked-In” existing mortgage rates below 5%

Financing | Mortgage Rates

• Tightening credit
• Mortgage rates in the 6% to 7% range
• Potential federal rate increases if inflation begins to rise steadily

Home Prices

• Home prices are still appreciating in the District, albeit at a much lower rate than is typical for this market
• Without easing of mortgage rates, buyers indicate that Washington DC home prices are unaffordable

Buyer Broker Compensation

The NAR-mandate that broker compensation be eliminated from MLS has resulted in less transparency, less data, confusion, and few changes to actual broker compensation. The result:

• Some buyers are holding back due to misunderstanding of new rules
• Sellers typically continue to either offer cooperative compensation (off-MLS) or include it in negotiations
• Broker compensation rates have not been meaningfully impacted
• Current market conditions make causation of higher DOM, broker compensation and slower sales pace in the District difficult to attribute to NAR settlement-related changes.

Economic Uncertainty

Though there are many guessing, no one knows for certain how the change from Biden to Trump administrations will impact the economy.

Primary Concerns

• Mortgage interest rates above 6% when many are locked into rates under 5% in their current homes. Many homeowners indicate that mortgage rates would need to move beneath 5.5% in order fora move to make sense
• Home prices | Profit  Some homeowners feel that home prices are supressed due to high inventory levels, low buyer demand. They indicate that they can make a larger profit by waiting until mortgage rates drop significantly to list their homes.

Home Prices
Home prices in Washington, DC have increased steadily over the past decade and the cost of living in the District is about 47% higher than the national average. Recent data from RentCafe shows DC housing costs are a whopping 140% higher than the national average (purchase and rent). It’s no wonder that  homebuyers have hit their affordability ceiling!

Economic Uncertainty
Nobody likes an ‘iffy’ economy, D.C. least of all. Washington, DC, has the highest number of federal employees in the nation (162,144) , according to USA Facts. This represents nearly half (43.3%) of the District’s workforce. Many more have jobs related to the government. It’s not surprising, therefore, that threats to federal jobs are taken seriously here. With most pundits tamping down expectations for a recovering housing market in 2025, and job stability up in the air, District homeowners are likely to respond by staying put… at least until the dust settles.

Existing Mortgages

Accroding to recent data, approximately three-quarters of existing mortgages in the U.S. carry rates under 5%, and a significant portion of those have ratesbelow 4%.

Inventory

Supply of homes in Washington DC is at a ten year high as we enter 2025 according to data from SmartCharts cited on realestateinthedistrict.com.

No one knows with 100% certainty how markets will react once the new administration policies are fully in place, which policies will actually be pursued, their priority, or how much time it will take to implement them. The FOMC can adapt its policy as the economic picture evolves in 2025. Financial and mortgage markets will do the same. Consumers should consider their financial positions, needs and job security when deciding whether to buy or sell a home in Washington DC in 2025.

Timing the market is folly.  If you plan to purchase a home in the near future in or outside the District, and you believe mortgage rates will rise in 2025, the best strategy is to act early in the year.

If you have a DC home to sell and your target buyer is likely to need a mortgage to purchase, consider selling this January when inventory is lowest. Susan can help you price and present your home to its best advantage.

Each buyer and seller has different circumstances and needs. Reach out to discuss your situation and goals.

Compass is the #1 real estate brokerage in the nation and a leader in real estate technology.