Interest Rate Outlook – Not Budging for Now
The Federal Reserve continues to keep short term interest rates unchanged, and a combination of factors keep long-term rates higher. The greater question is whether relief will come for the Real Estate market by the end of the year and in 2026.
Economic growth is still surprising analysts. The second quarter GDP reading from the Atlanta Fed shows cumulative macroeconomic growth high at 3.8%, well ahead of Blue Chip forecasts of just 1% growth for the quarter. This can still adjust downward in the coming weeks as new data is fed into the GDPNow models, but economic growth is stronger than expected despite tariff and trade negotiation headwinds. That factor, plus a strong labor report, is keeping the Federal Reserve anchored to current interest rates.
As a result, the bond market is closely monitoring the Federal Reserve’s actions, a growing U.S. deficit, and a new budget bill expected to increase that deficit. Additionally, inflation remains volatile and could face further upward pressure in the short term due to the impact of new tariffs. That combination of factors has pushed the yield rate on the 10-Year US Treasury to 4.49% and the 30-Year Mortgage Rate higher at 6.85% along with it. The US Treasury is working to get the 10 Year Treasury under 4% by the end of the summer, but headwinds continue to make that goal seem elusive.
Many home builders and general contractors still cite high interest rates as one of the larger prohibitive factors keeping new home and nonresidential starts lower than expected. Hopefully by the second half of the year or early in 2026, the Federal Reserve will ease rates and help pull bond yields lower.
Additional Reading: Atlanta Fed GDPNow
Department of Government Efficiency and Real Estate Data
Some of the first data available on layoffs under the Department of Government Efficiency (DOGE) program has been released, and there are some interesting real estate implications for some markets in the US. And, because the data is abnormal (much like a Black Swan Event) it is difficult to know what the real impact will be. For instance, Washington, DC had 285,723 government employees laid off YTD through May. The estimate is that for every one government worker, between 1-3 private sector employees are impacted. In the case of Washington, DC, that doesn’t necessarily mean that all of those private sector employees impacted by the cuts would also be located in the DC area. They could be anywhere. But the impact to the immediate vicinity would be significant.
Other areas being hit by government layoffs included California (93,586), New York (65,027), Texas (28,050) and Ohio (27,671). These states don’t give specific cities being impacted directly as is the case in the Washington, DC estimate, but it could have an impact on local housing markets as a result. The layoffs in the DC area have led a 25.1% year-over-year increase in active home listings, the large jump since 2015. And some areas around DC are much higher. Listings in Alexandria, VA are up 41%, Montgomery County, MD are up 38.5% and Loudoun County, VA are up 36.8%. This comes despite many workers being given a severance package that keeps them employed through September, and creates a harbinger perhaps for things to come.
But for every one person caught up in the Government trimming activity, 9 others are being forced back into the office. Many of these workers have relocated during COVID and are finding it easier to commute Monday through Friday and then return home on the weekends, which is keeping the housing market volatile. Many are taking up condos and smaller homes during the week while keeping their primary residence elsewhere, and this is clouding the housing market data. For instance, prices in the DC market have not fallen, they actually increased 4.1% despite the significant increase in listings. And much of this could be from absorption attributed to the return-to-office mandate.
It will be difficult to understand how this Black Swan event will impact the housing market in various cities around the country. For now, it appears as though much of this transition will be absorbed and the impact will be spread around the country, leading to very little macro-impact on the national housing market. That leaves debates over interest rates and home prices as the leading reason why the market remains sluggish.
Source: Atlanta Fed; Challenger Report
