Fannie Mae Economic Developments – February 2025

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Summary:

This source, a Fannie Mae Economic Developments report from February 2025, discusses the strong economic start to 2025 driven by robust GDP and a firming labor market, while also addressing future policy uncertainty, particularly surrounding potential tariffs. The report offers updated forecasts for key economic indicators, including GDP outlook, inflation forecast, and mortgage rate outlook, anticipating slightly slower growth later in the year and stickier inflation leading to only one expected Fed rate cut. It also provides updates on the housing forecast, with minor revisions to existing and new home sales and single-family housing starts, and adjusts the outlook for single-family mortgage originations based on these changes and the higher mortgage rate expectations. Overall, the report presents a view of a resilient economy facing headwinds from potential trade policies that could introduce volatility to forecasts.

 

Main Theme and key Findings:   

Key Points:

  • Executive Summary:

    Fannie Mae’s February 2025 economic forecast paints a picture of a US economy entering the year with surprising strength, fueled by robust consumer spending and a firming labor market. However, this positive momentum is tempered by increased inflation stickiness, leading to expectations of fewer Federal Reserve rate cuts and a modest upward revision to mortgage rate projections. The report also highlights the significant uncertainty stemming from potential future trade policies, particularly additional tariffs beyond the already implemented 10% on Chinese imports. While the housing market outlook remains largely unchanged, with a slight upgrade to existing home sales offset by a minor downgrade to new home sales, affordability challenges and the “lock-in effect” for existing homeowners are expected to keep sales relatively subdued. Overall, the forecast underscores the interplay between strong current economic data and looming policy uncertainties, particularly in trade and monetary policy, which are expected to contribute to continued market volatility.

  • Key Themes and Important Ideas/Facts:

  1. Strong Economic Momentum at the Start of 2025:

    • Incoming data for late 2024 and early 2025 indicates a stronger-than-anticipated economic performance.
    • GDP Growth: The fourth quarter 2024 GDP grew at a 2.3 percent annualized rate, close to Fannie Mae’s forecast. Notably, “final sales to private domestic purchasers…posted an even stronger 3.2 percent annualized growth rate compared to topline GDP growth of 2.3 percent,” suggesting underlying strength.
    • Labor Market: The January labor report showed a “reaccelerating labor market to end 2024,” with the three-month moving average of employment gains hitting the highest level since March 2023. Adjustments to population estimates also revealed a larger employed population.
    • Inflation: Despite the strong economy, inflation remains persistent. “In January, the core CPI rose 0.4 percent over the month and ticked up one-tenth to 3.3 percent compared to a year ago.” Fannie Mae notes that “year-over-year core CPI readings have not decelerated meaningfully in eight months.”

  2. Upward Revision to Inflation Forecast and Reduced Fed Rate Cut Expectations:

    • Higher-than-expected recent inflation data has led to an upward revision of Fannie Mae’s inflation outlook.
    • CPI Forecast: Headline CPI is now expected to be 2.8 percent and core CPI 2.9 percent on a Q4/Q4 basis in 2025 (previously 2.5 percent for both).
    • Federal Funds Rate: Reflecting the “sticky” inflation, Fannie Mae now expects only one 25-basis-point cut to the federal funds rate in 2025, anticipated in September. This aligns with current financial market expectations.

  3. Impact of Tariffs and Trade Policy Uncertainty:

    • The forecast incorporates the currently implemented additional 10 percent tariff on imports from China.
    • This tariff is estimated to have a modest negative impact on GDP growth (“reduced our GDP forecast by one-tenth on a Q4/Q4 basis”) and a slight upward impact on inflation (“increased our CPI forecast for 2025 by roughly the same magnitude”).
    • The report emphasizes that other proposed tariffs not currently implemented present “higher-than-usual risks to our current outlook.” Financial markets have reacted more strongly to potential tariffs on Canada and Mexico.
    • Uncertainty’s Impact: “Sustained uncertainty may weigh on business investment and consumer spending as firms and households delay activities.” The Economic Policy Uncertainty Index has spiked to near-recessionary levels.

  4. Unclear Effects of Trade Policy on Mortgage Rates:

    • Fannie Mae states that “It’s not clear how all of this will affect mortgage rates.“
    • They outline plausible scenarios for both higher and lower mortgage rates depending on the specifics of future tariffs, retaliatory measures, currency adjustments, and the Federal Reserve’s response.
    • An increase in inflationary expectations due to tariffs could lead the Fed to hold rates higher, putting upward pressure on mortgage rates.
    • Conversely, if tariffs significantly slow economic growth, expectations for Fed easing and “flight-to-safety dynamics” could lead to lower long-run interest rates.
    • The interplay with broader fiscal policy (e.g., how tariff revenues are used) further complicates the outlook for monetary policy and interest rates.
    • Expectation of Volatility: Fannie Mae reiterates the expectation of “heightened volatility” in mortgage rates as trade, fiscal, and monetary policy developments unfold.

  5. Modestly Revised Housing Market Outlook with Persistent Challenges:

    • Existing Home Sales: Upwardly revised slightly for the near term due to stronger-than-expected December data and purchase mortgage applications. However, the outlook for 2026 is slightly down due to higher mortgage rate expectations.
    • New Home Sales: Downwardly revised modestly to reflect a weaker-than-expected Q4 2024 and the higher mortgage rate outlook, though new home sales are still expected to be a “comparative bright spot.”
    • Housing Starts: Single-family starts are expected to decline slightly in 2025 as builders work through existing inventory. Tariff policies pose a risk to new home construction costs due to potential impacts on lumber and other building material prices. Multifamily starts forecast revised upward following strong December data, with long-term demographic trends expected to be supportive.
    • Home Prices: The quarterly home price forecast (last updated in January) remains unchanged, projecting national home price growth of 3.5 percent (Q4/Q4) in 2025.
    • Persistent Challenges: The report highlights that “we believe sales are likely to remain subdued, in light of continued lock-in effects and affordability challenges.”

  6. Slight Adjustments to Mortgage Origination Forecasts:

    • Purchase Originations: Upwardly revised slightly for 2025 due to stronger existing home sales data, but downwardly revised for 2026 due to higher expected mortgage rates dampening sales.
    • Refinance Originations: Downgraded again for both 2025 and 2026 due to higher actual and expected mortgage rates, keeping refinance activity well below previous upticks.

  • Key Quotes:

    • “Incoming economic data since our last forecast…point to an economy that entered 2025 with strong momentum.”
    • “We have upwardly revised our inflation forecast primarily due to higher-than-expected recent data releases.”
    • “In line with financial markets, we now expect just one cut to the federal funds rate this year as the Fed responds to inflation data that is more ‘sticky’ than previously anticipated.”
    • “This forecast incorporates the currently implemented additional 10 percent tariff on imports from China…Other tariff proposals that are not currently implemented are not included in our base forecast, though they present higher-than-usual risks to our current outlook.”
    • “The net effect of tariffs on mortgage rates is unclear, and there are plausible scenarios for both upward and downward movement in rates. As such, we continue to expect mortgage rate volatility…”
    • “Still, we believe sales are likely to remain subdued, in light of continued lock-in effects and affordability challenges.”

  • Conclusion:

    The February 2025 Fannie Mae economic forecast suggests a resilient US economy in the near term, but one facing significant headwinds from persistent inflation and the uncertainty surrounding future trade policies. These factors are expected to limit Federal Reserve action on interest rates and contribute to ongoing volatility in the financial and housing markets. While the housing market shows some pockets of strength, particularly in new home sales, affordability and the lock-in effect will likely constrain overall activity. Careful monitoring of inflation data, Federal Reserve communications, and trade policy developments will be crucial in assessing the evolving economic landscape.

Detailed Timeline

  • Late 2024:

    • Q4 2024:GDP Growth: The economy grew at a 2.3 percent annualized rate, close to Fannie Mae’s forecast.
    • Consumption: Experienced stronger-than-expected growth at a 4.2 percent annualized rate.
    • Inventory Investment: Acted as a significant drag on GDP growth.
    • Final Sales to Private Domestic Purchasers: Showed a strong 3.2 percent annualized growth rate.
    • Labor Market: Experienced a reacceleration of hiring towards the end of the year.
    • Nonfarm Employment: Revised downwards by 589,000 through March 2024 due to annual benchmarking.
    • Payroll Employment Gains: Averaged only 82,000 from June to August, but November and December saw upward revisions.
    • New Home Sales: Rebounded less than anticipated following hurricane disruptions in October.
    • Housing Starts: Rose somewhat more than anticipated.
    • Existing Home Sales: Increased by 2.2 percent in December to a seasonally adjusted pace of 4.24 million.
    • Purchase Mortgage Applications: Remained higher than anticipated on average.
    • Pending Home Sales: Fell by 5.5 percent in December.

    January 2025:

    • Labor Market:Household Survey: Adjustments to population estimates (reflecting higher immigration) caused an upward revision of over 2 million employed people.
    • Unemployment Rate: Declined to 4.0 percent, an eight-month low.
    • Nonfarm Payroll Employment: Increased by 143,000.
    • Inflation:Core CPI: Rose 0.4 percent over the month and ticked up to 3.3 percent year-over-year.
    • Headline and Core CPI: Showed signs of stickiness, with year-over-year core CPI not decelerating meaningfully in eight months.
    • Mortgage Rates: Experienced a rise.
    • Home Prices: Grew 5.8 percent on a national basis in 2024 (this data point is from January’s update).

    February 2025 (Based on the Report):

    • Economic Outlook:The economy entered 2025 with strong momentum.
    • GDP Forecast: Modestly revised to 2.2 percent Q4/Q4 for 2025, with stronger Q1 growth offset by a slower pace later in the year.
    • Inflation Forecast: Upwardly revised due to higher-than-expected recent data. CPI expected to be 2.8 percent and core CPI 2.9 percent on a Q4/Q4 basis in 2025.
    • Federal Funds Rate: Expectation revised to just one 25-basis-point cut in September 2025.
    • Tariffs and Trade Policy:The forecast incorporates the currently implemented additional 10 percent tariff on imports from China.
    • This tariff is estimated to reduce the 2025 GDP forecast by one-tenth and increase the 2025 CPI forecast by roughly the same magnitude.
    • Other proposed tariffs are not included but represent higher-than-usual risks.
    • Trade policy uncertainty is noted to be high.
    • Mortgage Rate Outlook:Modestly upgraded, with rates expected to end 2025 at 6.6 percent and 2026 at 6.5 percent.
    • Continued volatility expected due to tariff implementation, economic data, and fiscal policy changes.
    • Housing Forecast:Existing Home Sales: Slightly upgraded for the near term due to stronger December data, but expected to remain sluggish due to lock-in effects and affordability challenges. 2025 sales projected to rise slightly (2.9 percent) but remain significantly below 2019 levels.
    • New Home Sales: Modestly revised downward for 2025 to reflect weaker-than-expected Q4 2024, despite a belief that this market will be a comparative bright spot.
    • Single-Family Housing Starts: Expected to fall slightly (1.4 percent) in 2025 after a rise in 2024, as builders work off inventory. Tariff policies pose a risk to material prices.
    • Multifamily Housing Starts: Forecast revised upward following strong December data, with long-term support expected from demographic trends.
    • Single-Family Home Prices: Forecast remains unchanged from January, projecting 3.5 percent growth in 2025 (Q4/Q4).
    • Single-Family Mortgage Originations:Purchase Originations: Slightly revised upward for 2025 to $1.4 trillion due to stronger existing home sales data. Revised downward for 2026 to $1.6 trillion due to a higher mortgage rate forecast.
    • Refinance Originations: Downgraded again for both 2025 ($464 billion) and 2026 ($650 billion) due to higher actual and expected mortgage rates.

    Future Expectations (Mentioned in the Report):

    • Continued mortgage rate volatility is expected as trade, fiscal, and monetary policy developments unfold.
    • The next update to the single-family home price forecast will be in April.
Question and Answer:
According to Fannie Mae’s February 2025 forecast, what is the expected Q4/Q4 GDP growth rate for 2025, and how has it been revised since the last forecast?
  • Fannie Mae’s February 2025 forecast projects a Q4/Q4 GDP growth rate of 2.2 percent for 2025, a modest revision from the previous forecast with stronger Q1 growth offset by a slower pace later in the year.

What are the updated Q4/Q4 forecasts for CPI and core CPI in 2025, and what is the primary reason for these revisions?
  • Evaluate the potential impact of the currently implemented tariffs on imports from China on the U.S. economy, as described by Fannie Mae, and discuss the uncertainties surrounding the effects of other potential tariff measures.

Fannie Mae now expects just one 25-basis-point cut to the federal funds rate in September 2025. This change is due to inflation data proving more “sticky” than previously anticipated, aligning with financial market expectations.
  • Fannie Mae now expects just one 25-basis-point cut to the federal funds rate in September 2025. This change is due to inflation data proving more “sticky” than previously anticipated, aligning with financial market expectations.

What is the direct impact incorporated into Fannie Mae’s forecast regarding the additional 10 percent tariff on imports from China?
  • The incorporated direct impact of the additional 10 percent tariff on imports from China has reduced the GDP forecast by one-tenth on a Q4/Q4 basis and increased the CPI forecast for 2025 by roughly the same magnitude.

What is Fannie Mae’s outlook for the 30-year fixed-rate mortgage at the end of 2025 and 2026, and what factor contributes to potential volatility in mortgage rates?
  • Fannie Mae expects the 30-year fixed-rate mortgage to end 2025 at 6.6 percent and 2026 at 6.5 percent. Mortgage rate volatility is expected as markets react to tariff implementation, incoming economic data, and other fiscal policy changes.

Describe Fannie Mae’s current housing forecast, specifically mentioning any changes to the outlook for existing and new home sales.
  • Fannie Mae’s housing forecast is little changed, with a slight upgrade to existing home sales due to stronger-than-expected December data and a modest downward revision to the new home sales forecast due to weaker-than-expected Q4 2024 data.

What is the updated forecast for single-family mortgage origination volumes in 2025, and what factor led to this slight modification?
  • The updated forecast for single-family mortgage origination volumes in 2025 is $1.89 trillion (previously $1.92 trillion). This slight modification is primarily due to the modest changes in the housing sales outlook and mortgage rate forecast.

What key development in the January labor report contributed to a more confident assessment of the labor market’s strength?
  • The January labor report showed that the three-month moving average of employment gains hit 237,000 in post-revision data, the highest level since March 2023, painting a picture of a reaccelerating labor market to end 2024.
Explain why Fannie Mae believes new home sales and construction will remain comparatively strong in 2025 despite the overall sluggish housing market.
  • Fannie Mae believes new home sales and construction will remain comparatively strong because homebuilders have shown a willingness to continue to use concessions to drive sales, despite the challenges in the broader housing market.
How does Fannie Mae believe increasing tariffs could potentially lead to either higher or lower mortgage rates?
  • Increasing tariffs could lead to higher mortgage rates if the near-term increase in price levels raises inflationary expectations, prompting the Fed to hold rates higher for longer. Conversely, if tariffs significantly slow economic growth, expectations for Fed easing and flight-to-safety dynamics could lead to lower long-run interest rates.
FAQs
1. What is Fannie Mae’s outlook for the U.S. economy in 2025?
  • Fannie Mae anticipates the U.S. economy will continue to show strong momentum as it progresses through 2025. They project a Q4/Q4 GDP growth of 2.2 percent for the year, with stronger growth expected in the first quarter being partially offset by a slower pace of expansion later in the year. Recent economic data, including GDP, labor market figures, and inflation readings, support this view of a firm economic footing.

2. How has Fannie Mae revised its inflation forecast for 2025 and what are the key drivers?
  • Fannie Mae has upwardly revised its inflation forecast due to recent data indicating higher-than-expected inflation. They now expect the Consumer Price Index (CPI) to be 2.8 percent and core CPI to be 2.9 percent on a Q4/Q4 basis in 2025. This revision reflects “stickier” inflation than previously anticipated, leading to expectations of only one cut to the federal funds rate by the Federal Reserve in response.

3. What impact are the currently implemented tariffs on imports from China expected to have on the economy and inflation in 2025, according to Fannie Mae?
  • Fannie Mae’s forecast incorporates the currently implemented additional 10 percent tariff on imports from China. This tariff is projected to slightly reduce their GDP forecast for 2025 by one-tenth on a Q4/Q4 basis and increase their CPI forecast for the same period by roughly the same amount. While these effects are notable, they are considered modest compared to other factors influencing their overall forecast revisions.

4. What is Fannie Mae’s current outlook for mortgage rates in 2025 and 2026, and what factors contribute to this outlook and potential volatility?
  • Fannie Mae has modestly upgraded its mortgage rate outlook, expecting rates to end 2025 at 6.6 percent and 2026 at 6.5 percent. The impact of tariffs on mortgage rates is uncertain, with plausible scenarios for both upward and downward movement. As a result, Fannie Mae anticipates continued mortgage rate volatility as markets react to tariff implementation, incoming economic data, and other fiscal policy changes.

5. How does Fannie Mae view the housing market in 2025, particularly regarding existing and new home sales?
  • Fannie Mae’s housing forecast remains largely unchanged, with a slight upward revision to existing home sales due to stronger-than-expected data in December 2024. While they continue to expect new home sales to outperform existing sales, their new sales forecast has been modestly revised downward to reflect weaker-than-expected data in late 2024. Overall, existing home sales are expected to remain subdued due to lock-in effects and affordability challenges.

6. What are Fannie Mae’s expectations for single-family mortgage origination volumes in 2025 and 2026?
  • Fannie Mae has slightly modified its outlook for single-family mortgage originations, projecting $1.89 trillion in 2025 (down from $1.92 trillion) and $2.22 trillion in 2026 (down from $2.27 trillion). These minor adjustments reflect the updated outlook for home sales and mortgage rates. Purchase origination forecasts have been slightly increased for 2025 due to stronger existing home sales data, while refinance originations have been downgraded due to higher actual and expected mortgage rates.

7. What is the level of risk and uncertainty surrounding Fannie Mae’s current economic forecast, and what are some of the key contributing factors?
  • Fannie Mae emphasizes that current trade policy uncertainty presents higher-than-usual risks to their forecast this month. While they have incorporated the implemented tariffs on China, other potential tariff measures create downside risk. Sustained uncertainty related to trade policy could weigh on business investment and consumer spending. Additionally, the effects of trade policy on mortgage rates are unclear and depend on various factors, including retaliatory actions and central bank responses.

8. How has the labor market performed recently, according to Fannie Mae’s analysis of the latest data?
  • Fannie Mae’s analysis of recent labor market data, including the January labor report, indicates that the labor market firmed in recent months. While the annual benchmarking process resulted in a downward revision of total nonfarm employment through March 2024, the revision was smaller than initially estimated. Importantly, net hiring in late 2024 was revised upward, and the three-month moving average of employment gains in January 2025 reached its highest level since March 2023, suggesting a reaccelerating labor market. Adjustments in the household survey also showed an upward revision in the number of employed people, contributing to a more consistent picture of sturdy labor market conditions across different surveys.
Glossary:
  • Gross Domestic Product (GDP): The total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.
  • Consumer Price Index (CPI): A measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
  • Core CPI: A measure of CPI that excludes volatile food and energy prices to provide a more stable underlying inflation trend.
  • Federal Funds Rate: The target rate that the Federal Reserve wants banks to charge one another for the overnight lending of reserves.
  • Tariff: A tax imposed by a government on goods and services imported from other countries.
  • Mortgage Rate: The interest rate charged on a mortgage loan, typically expressed as an annual percentage.
  • Existing Home Sales: The number of previously owned homes that were sold during a specific period, often reported on a seasonally adjusted annual rate (SAAR).
  • New Home Sales: The number of newly constructed homes that were sold during a specific period, often reported on a seasonally adjusted annual rate (SAAR).
  • Single-Family Housing Starts: The number of new single-family homes on which construction has been started during a specific period, often reported on a seasonally adjusted annual rate (SAAR).
  • Single-Family Mortgage Originations: The total volume of new mortgage loans issued for single-family homes during a specific period.
  • Lock-in Effect: The phenomenon where existing homeowners are reluctant to sell their homes because their current mortgage interest rate is significantly lower than prevailing market rates.
  • Basis Point: One-hundredth of a percentage point, used to describe changes in interest rates or yields.
  • Seasonally Adjusted Annual Rate (SAAR): A statistical technique used to remove the impact of predictable seasonal patterns from data, allowing for easier comparison across different time periods and projection of an annual figure.
  • Refinance: Replacing an existing mortgage loan with a new one, often to obtain a lower interest rate or change the loan term.
  • Fiscal Policy: Government use of spending and taxation to influence the economy.
  • Monetary Policy: Actions undertaken by a central bank, like the Federal Reserve, to manipulate the money supply and credit conditions to stimulate or restrain economic activity.
Cast Of Characters:

  • Fannie Mae Economic & Strategic Research (ESR) Group:

    • Mark Palim: SVP and Chief Economist at Fannie Mae. Leads the ESR Group and is responsible for the overall economic and housing market forecasts presented in the report.
    • Patty Koscinski: Economics Senior Director within the ESR Group. Likely plays a key role in developing and overseeing specific aspects of the economic forecast.
    • Eric Brescia: Economics Manager in the ESR Group. Contributes to the analysis and forecasting of economic indicators.
    • Nick Embrey: Economics Manager in the ESR Group. Similar to Eric Brescia, involved in economic analysis and forecasting.
    • Eric Hardy: Economist within the ESR Group. Conducts economic research and contributes to the team’s forecasts.
    • Nathaniel Drake: Economic Analyst in the ESR Group. Supports the economists with data analysis and research.
    • Richard Goyette: Economic Analyst in the ESR Group. Similar to Nathaniel Drake, assists with economic data and research.
    • Daniel Schoshinski: Economic Analyst in the ESR Group. Provides analytical support for the economic forecasting team.
    • Ryan Gavin: Economic Analyst in the ESR Group. Contributes to the team through data analysis and research efforts.

    Other Entities and Concepts Mentioned:

    • Federal Reserve (the Fed): The central banking system of the United States. Its monetary policy decisions, particularly regarding interest rates (federal funds rate), have a significant impact on the economy and mortgage rates. The report anticipates only one rate cut in 2025 due to persistent inflation.
    • China: A major trading partner of the United States. The report incorporates the impact of an additional 10 percent tariff on imports from China on GDP and inflation forecasts.
    • Canada and Mexico: Mentioned as countries where potential tariffs could have a stronger negative impact on the US economy, leading to downside risk in the forecast.
    • U.S. Treasury: The government entity responsible for issuing Treasury bonds. Foreign investment, partly linked to the trade deficit, helps fund this issuance, influencing longer-term interest rates.
    • Census Bureau: The U.S. government agency responsible for producing data about the American people and economy, including population estimates. Revisions to these estimates impacted the January labor market data in the household survey.
    • Bureau of Labor Statistics (BLS): A government agency that collects and analyzes data on labor market activity, including employment, unemployment, and inflation (CPI). The report references their benchmarking process and CPI data.
    • Bureau of Economic Analysis (BEA): A government agency that produces macroeconomic data, including the Gross Domestic Product (GDP). The report discusses their GDP reports and revisions.
    • Mortgage Bankers Association (MBA): A national association representing the real estate finance industry. Their data on mortgage applications is used in Fannie Mae’s housing market analysis.

 

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