This article originally appeared in the July 2025 edition of MortgagePoint magazine, online now.
Seven months after President Trump took office for his second term, the housing landscape is marked by a complex mix of steady economic growth and emerging vulnerabilities. While GDP growth has hovered around 2.5% to 3% annually in recent years, this year’s outlook is notably less optimistic, with forecasts now calling for slower growth amid uncertainty over trade policy and tariffs. President Trump’s “Liberation Day” tariff proposals, introduced this past spring, have injected volatility into both the broader economy and the housing sector, with many questions remaining about the ripple effects and long-term impact.
Some experts project that tariffs on key building materials, including lumber, steel, and aluminum, could significantly impact the cost of building and purchasing a home. This added cost pressure comes at a time when affordability is already stretched for many buyers, and builders, suppliers, and consumers try to absorb or pass on these increases.
Meanwhile, mortgage rates have remained stubbornly high, with Freddie Mac pinning the 30-year fixed mortgage rate at 6.77% as of the late-June time of this writing. This environment has forced both buyers and sellers to recalibrate their expectations, with the market gradually acclimating to rates that, while elevated by recent standards, remain within historical norms.
Brisk and often unpredictable legislative and regulatory developments in Washington have also added layers of complexity. The potential for changes to tax policy, GSE reform, and banking deregulation could all reshape the mortgage landscape in the months ahead.
The recent confirmation of Michelle Bowman as Vice Chair of the Federal Reserve signals a possible shift toward a more business-friendly regulation environment, which could entice large banks to re-enter the mortgage space after years of retrenchment.
Against this backdrop of uncertainty, shifting policy, and regional divergence, MortgagePoint spoke with two of the industry’s leading economists: Michael Fratantoni of the Mortgage Bankers Association and Mark Fleming of First American Financial Corp., to unpack what these trends mean for lenders, borrowers, and the broader housing economy in the second half of 2025 and beyond.
Liberation Day & Beyond
Michael Fratantoni: It’s important to break these six months into three different parts: The pre-Liberation Day period, the immediate reaction to the Liberation Day proposals, and the time since. Coming into this year, we were expecting a slowdown in economic growth.
The U.S. economy has been growing about 2.5%-3% annually for the last couple of years. We were looking for about 1.5% this year. We thought the Liberation Day proposals would be quite stagflationary. Our April forecast was for about 0% growth for the year, and our expectation for the consumer price index inflation was above 4%.
Since then, you’ve had various iterations of walk-backs on different aspects of the tariff proposal and potential legal challenges, which could lead to different results. Now we’re looking for economic growth for the full year of a little less than 1%. That lines up with the way financial markets have reacted to the tariff proposal changes.
The residual impact of the tariff proposals is high levels of uncertainty. People don’t know where this tariff rate is going to wind up and don’t know how long this trade war is going to continue. I would expect that we’re going to start seeing in the data evidence of people pausing for a bit as they’re waiting to see the direction of tariff and economic policy.
We are seeing both households and businesses trying to make decisions, to try to get the best price they can. We saw a huge flood of imports in the fourth quarter of 2024, which stopped in the first quarter and started bouncing back in the second quarter.
In our sector, the largest impact will likely be in the construction of new homes. The tariffs on lumber, steel, and aluminum are the ones that are going to most directly impact the cost. There are estimates that the incremental cost of new homes will increase by $8,000-$20,000 as a result of the tariffs. I don’t think you’re going to see people be able to time the purchase to get around the tariffs. Different players across the sector are bearing those costs right now. In some cases, the increased costs are being passed on to the end consumer. In other cases, the builders and taking on some of the increased costs; in some cases, the suppliers are absorbing some of the increase.
Over the next couple of years, if these tariff rates are increased as much as has been indicated, it’s all going to be passed through to the home buyer because, whether it’s the builder or the supplier, their margins can’t take that kind of a hit for an extended period.
Mark Fleming: While the Federal Reserve remains in wait-and-see mode, mortgage rates have stayed between 6.6 and 7% all year. Assuming at most two rate cuts this year, which is not a foregone conclusion, it’s foreseeable that mortgage rates will remain in this range or at best only go modestly lower. It’s reasonable to expect the housing market to acclimate to mortgage rates in the mid-sixes, which is historically a very normal level.
Fratantoni: The Federal Reserve controls a short-term overnight rate, which is only indirectly impacting mortgage rates that have been on hold over the course of this year. We expect two rate cuts of a quarter point this year.
We don’t expect that to have a big impact on longer-term mortgage rates or 10-year Treasuries. Last year and so far, this year, 30-year mortgage rates moved from the low 6% range, then jumped in anticipation of the new administration. Then you had the Liberation Day impact, which led to turmoil in the financial markets, so the spread between mortgaged rates and Treasuries widened from 2.2 to 2.5 percentage points.
It’s come in a bit since then. We expect that it will continue to tighten a bit throughout 2025. The 30-year mortgage rate is at about 6.8% today. We think we’ll be closer to 6.5% by the end of this year.
Legislation & Regulations
Fratantoni: Several provisions within the tax bill that passed the House and now is before the Senate could have an impact on real estate markets. The overall rate of taxation or any specific provisions could impact demand for real estate or the cost of financing real estate. Also, any potential changes to the status of Fannie Mae and Freddie Mac could impact liquidity in the secondary market, and ultimately, the cost of mortgage financing.
There could be deregulation in the banking sector. There could be a new head of supervision and regulation of the Federal Reserve. Michelle Bowman was just confirmed as Vice Chair. She’s likely to take overall bank regulation in a more business-friendly direction.
That could have both broader economic benefits and specific benefits for the mortgage market. If we make some needed changes to bank regulation, we could see at least some big banks, which had been backing away from the mortgage markets, become more active.
FHFA, CFPB, HUD, FHA, and the VA all have active home loan programs. There are disagreements about where the policies and regulations are. Our members would like a consistent operating framework. Also, these agencies need to be staffed sufficiently to conduct their operations and make loan approvals.
The Housing Market: Location, Location, Location
Fratantoni: We are seeing some pretty distinct differences in state and regional housing markets. The weaker markets right now are in Florida and Texas, and other areas along the Gulf Coast. Denver, Colorado, and Austin are also seeing some price declines.
We’ve seen a lot of new construction over the past couple of years, and now there has been a bit of a pullback. It just seems like we’re at a point right now where supply was just running ahead of demand, and so now we’re seeing prices adjust, and you’re seeing homes linger on the market longer now.
But the medium- to long-term fundamentals are quite strong. These are areas of the country that tend to be the beneficiaries of domestic migration. People move out of higher-cost, higher-tax states into the Southeast and Southwest. There are many amenities in these areas as well. The other aspect of these South and West states and regions is that it’s just easier to build.
It’s quicker to get new construction approved. There’s more undeveloped land, so there are economies of scale in the construction process. They can put up more units more quickly. The flip side of that would be the Northeast, where the market is strong; inventory still remains pretty constrained, and you’re seeing ongoing home price growth. That is also happening in a number of Midwest markets, though it’s not as strong as the Northeast.
These are areas where you’re seeing sort of net migration out of some of these markets, particularly the higher-cost ones, like New York. But because it’s so difficult to put new units up, either single-family or multi-family in some of these older, more developed cities and states, their prices have held up better, even with this slowing in demand over the past couple of months.
Fleming: There is significant variation in house price appreciation across markets driven by differences in the local supply and demand dynamics. In March, house prices declined in 13 of our top 50 metro markets, compared with a year ago. Notably, six of those 13 markets are in Texas or Florida—two regions that saw rapid pandemic-era expansion. Prices declined the most in Tampa, Florida, in March, falling by nearly 5% year over year, with the decline driven by a combination of persistent high mortgage rates, cooling demand, and rising inventory.
At the other end of the spectrum, Cincinnati led the country with over 9% annual price growth. Tight inventory in a relatively affordable market continues to support strong price gains in this market. These two examples highlight a diverging housing landscape, where market fundamentals are pulling prices in different directions across regions.
Our First American Data & Analytics House Price Index segments home price changes into three price tiers based on local market sales data: a starter tier, which represents home sales prices at the bottom third of the market price distribution; a mid-tier, which represents home sales prices in the middle third of the market price distribution; and the luxury tier, which represents home sales prices in the top third of the market price distribution.
According to our April report, the starter home price tier is the strongest, driven by first-time homebuyer demand relative to a shortage of existing homeowners selling. Markets with the strongest growth in the starter home price tier are predominantly located in the Northeast or Midwest, including Pittsburgh, Baltimore, and St. Louis—markets that are attractive to potential first-time homebuyers due to their relative affordability.
Navigating the Fault Lines
As the mortgage industry enters the second half of 2025, the market’s underlying “fault lines” remain a defining feature. While national economic growth continues at a subdued pace and policy uncertainty lingers, the housing sector is increasingly shaped by regional disparities, evolving regulatory frameworks, and affordability challenges. The expert insights shared here underscore that, despite near-term headwinds, the sector’s long-term fundamentals remain resilient.
AEI’s Ed Pinto on The Power of Lot Size & Light-Touch Density Zoning
Ed Pinto: At AEI, we’ve coined the three most important things in affordability: small lots, small lots, small lots. It all comes down to small lots. If you have a smaller lot, it’s less land, so it costs less.
Secondly, the house is going to be smaller, which means less square footage, which means a lower price. Three, when you shift into a townhome on an even smaller lot, even though it has about the same square footage, you have fewer windows, fewer exterior walls, and it’s a simpler construction. A townhome of 1,400 square feet, even beyond the land, costs less to build per square foot by 15% or more than the same-sized single-family detached house of 1,400 square feet at the same location but on a larger lot.
In Texas, in 1998, Houston passed an ordinance that reduced the minimum lot size in a roughly 100-square-mile area bounded by Interstate 610, which bounds the inner part of Houston. That led to an explosion of small-lot housing. Tens of thousands of homes were built, which helps explain why Houston has such a low homelessness rate. Then, they expanded that to the entire city around 2013 or 2014. Austin adopted a similar ordinance about three years ago. This month, the Texas House and Senate and the governor signed a bill that applies to new residential subdivisions of five acres or more in counties with 300,000 people or more but applies only to the cities within those counties with 150,000 people or more. In those cities, in those counties that are subdividing five acres or more, you can set the minimum lot size to no less than 3,000 square feet, and there’s a bunch of other provisions that have to do with floor-area ratio and side lots and parking, all of which is good in terms of light-touch density.
Do this broadly across the nation and we would get over 5 million additional homes over 10 years on the same amount of land. If you were to have light-touch density in existing single-family residential neighborhoods where it’s economically viable to tear down what’s there and build homes on smaller lots, you’d add another four or five million homes. Then have your Bureau of Land Management land, which could account for another 2 million. Then we have what we call livable urban villages, which just add an overlay of residential on top of existing commercial/industrial/retail areas. You’re not required to build housing; just make it legal. That’s another 4 million or 5 million. You add all that up and you’re at 17 million homes added over 10 years. That’s huge.
The post Fault Lines in the Market first appeared on The MortgagePoint.
