Despite gross domestic product (GDP), labor market and inflation data that points to a strong economy to kick off 2025, the Fannie Mae Economic and Strategic Research (ESR) Group now expects bleaker measures of inflation and economic growth as the year goes on.
While the ESR Group’s outlook for GDP growth is unchanged at 2.2% for 2025, it upwardly revised its expectations for the Consumer Price Index (CPI), which is now forecast to end 2025 at 2.8% growth, up from its previously predicted figure of 2.5%. The ESR Group attributes the changed expectations to recent higher-than-expected inflation readings, as well as the recent 10% additional tariff on imports from China.
Commentary from the ESR Group released Thursday calls for tariffs to stunt growth and put slight upward pressure on inflation. But current risks to the outlook are higher than normal due to uncertainty around trade policy, including additional tariff proposals, the group said.
The group upwardly revised its mortgage rate predictions, calling for rates to average 6.6% in 2025 and 6.5% in 2026. Expectations for mortgage rate volatility this year remain intact as markets react to trade policy announcements, incoming economic data and other fiscal policy changes from the new Trump administration.
Conversely, the ESR Group made modest upward revisions to its existing-home sales outlook for 2025 due to a stronger-than-expected December sales pace. But economists note that the level of sales is still expected to be 22% below the pace seen in 2019.
“Economic growth was strong to start the year as fourth-quarter personal consumption data came in above our expectations,” said Kim Betancourt, Fannie Mae’s vice president of multifamily economics and strategic research. “Going forward, we expect the economy to decelerate slightly as consumer spending slows to a level more consistent with its historical relationship to income.
“However, ongoing uncertainty around trade policy adds risk to our GDP and inflation outlooks, which may have implications for mortgage rates, although the direction — up or down — would depend on a number of factors. Higher mortgage rates would exacerbate the existing ‘lock-in effect’ and worsen affordability, which may then weigh on home sales and mortgage originations activity. Of course, if mortgage rates move lower, we’d likely see an improvement in affordability and a corresponding pickup in housing activity.”
The ESR Group’s outlook for single-family mortgage originations was lowered to $1.89 trillion in 2025 (previously $1.92 trillion) and $2.22 trillion in 2026 (previously $2.27 trillion).
In terms of monetary policy, the group lowered its expectations for the federal funds rate following the recent CPI and labor reports.
“We now expect that the Fed will cut the federal funds rate by 25 basis points just once in 2025, and we expect that to occur in September,” the report read. “The potential impacts of further tariffs, as well as a resilient economy, also leave open the potential for zero rate cuts in 2025, though a resumption of interest rate hikes also appears unlikely at this time.”
