Reported from Washington, D.C. • kiplinger.com • Vol. 102, No. 10
Dear Client: Washington, March 6, 2025
Spring won’t do much to boost home sales this year. Elevated mortgage rates and home prices that continue to set records spell lousy affordability for buyers, especially first-time home buyers. But, sales should pick up later this year.
HOUSING
The basic problem for housing isn’t new: A dearth of inventory of existing homes on the market. Homeowners with cheap mortgages secured during the pandemic are mostly sitting tight. Rates aren’t high by historical standards, but 7% can seem daunting to someone with a 3% mortgage. Tight supply means prices will keep rising, by about 4% nationwide this year, vs. 3.9% in 2024. Mortgage rates should ease a little bit But not by enough to really ignite buying.
Many young adults are waiting out rates, continuing to rent when they would like to buy. Normally, first-time buyers make up 32% of sales, but their share is far lower now. The average age of a first-time buyer hit 38 last year. Back in 2019, when homes were more affordable, it was just 33. Renting is much cheaper on average than owning. But rents are headed up. Fewer new apartments will be hitting the market as the pace of construction slows. Combined with solid demand, vacancy rates will dip, pushing rents up modestly.
The bright spot for home sales: The new-home market. Supply is ample as builders continue to bring new inventory to market. New homes usually cost more than comparable existing homes. But builders have been able to offer sweeteners, like buydowns on buyers’ mortgage rates, to keep sales and construction humming. Later in the year, sales of existing homes should perk up, at least a little. We look for inventories to improve as more homeowners who have held off finally put up a for-sale sign. The recent drop in Treasury bond yields will lower rates on mortgages a bit. More important, buyers and sellers are likely to gradually realize that rates aren’t coming back down to where they were a few years ago. Some people who have been putting off moving can’t wait forever to relocate for a new job, expand, downsize in retirement, etc. That should give buyers a bit more bargaining power.
A new wrinkle for buyers: Realtors will be asking them to sign contracts before agreeing to work with them. Prompted by last year’s settlement with the NAR… National Assn. of Realtors…the contracts spell out how the agent will be compensated. For first-time buyers trying to break into this especially tough market: Note that not all lenders require the traditional 20% down payment for a loan, so it pays to shop around. With mortgage business weak, some lenders may be OK with accepting a lower down payment, especially for applicants with good credit scores.
President Trump is ratcheting up the diplomatic pressure on trade partners. A slew of new or increased levies are being applied or threatened...on aluminum and steel, Chinese goods, various items from countries that impose tariffs on U.S. wares and, most critically, imports from Canada and Mexico. Officials said he will delay tariffs on many Canadian and Mexican imports for a month, a welcome reprieve for importers. But if no long-term deal is worked out, many sectors will face major supply chain issues. Energy prices would likely feel the Canadian tariffs quickly, since Canada is America’s top source of imported oil, and a major source of natural gas and electricity. Areas that import a lot of Canadian gasoline, like the Northeast, would see prices rise by 20¢-40¢ per gallon vs. where they would be otherwise, with smaller rises elsewhere. Some retaliatory tariffs on U.S. exports have arrived or could shortly. Canada is considering duties on U.S. steel, aluminum, cars and alcohol. China is responding with 15% duties, mostly on ag goods. Mexico was mulling options as we went to press.
Get ready for a disappointing first-quarter GDP figure when the government releases its first estimate of the quarter’s growth next month. A big jump in imports, timed to get ahead of new and coming tariffs, is the major culprit. (Imports subtract from GDP, while exports add to it.) Also, unusual snowstorms in the South in Feb. likely suppressed a lot of normal economic activity. Ditto, the wildfires in L.A. The surge in imports should be temporary, with GDP gaining later this year as the drag from imports fades. Assuming, that is, that recent and threatened tariffs from the White House don’t lead to an all-out trade war among major trade partners. Also, some of the stuff being rushed into the U.S. now will be going into inventories, which adds to GDP in the statistical accounting until it is sold in future quarters.
We expect congressional Republicans to pass some sort of tax bill this year. But the overall boost to the economy may be limited. The budget agreement that House Republicans just passed, which sketches out how big their tax bill can be, allows for a $2.8 trillion net increase in the deficit over the coming decade. That figure, plus $1.2 trillion in planned spending cuts, yields $4 trillion to extend expiring parts of the tax cuts that President Trump signed into law in 2017. As fiscal stimulus goes, $2.8 trillion over a decade is modest for an economy with annual GDP of $28 trillion. The president has talked about larger tax cuts. But passing them is tricky. The budget reconciliation rules the GOP will use to get a tax bill through the Senate without a filibuster-proof 60-vote majority require a limit on how much the legislation adds to the debt over 10 years. And Republicans are wary of setting that limit too high.
Treasury bond yields are down now. But look out for an uptick later this year due to the likelihood of inflation perking up again. At the moment, markets are nervous about the tariffs President Trump is either implementing or threatening, which has led investors to pile into Treasuries and bid up their prices. Bond yields, which move inversely to prices, have fallen sharply. The benchmark 10-year note now yields about 4.3%, vs. 4.8% in mid-Jan. While yields may stay depressed or drop more in the near term, look for them to move higher in the second half of 2025. Monthly inflation reports are likely to show bigger price increases then, especially if new tariffs have a broad impact during the second half of 2025.
The Federal Trade Comm. will maintain stricter merger guidelines, implemented by the Biden administration, under President Trump. The guidelines lower the bar for antitrust review, allowing regulators to more easily challenge practices like vertical and cross-market mergers.
The move is a blow to businesses who hoped for looser antitrust policy from the new administration. Some Trump officials…including the vice president, JD Vance…have even praised Lina Khan, the woman who chaired Biden’s FTC.
But the guidelines will give businesses greater regulatory clarity.
Pa., Wis. and Hawaii may be the next states to approve marijuana for adult recreational use. Legalization bills are teed up in all three and odds are good that success may come in 2025, following years of misfires. The Democratic governors of all three states support legalization, as do most Dem and some Republican legislators. Public support is also strong. Pa. is the best bet for legalization. Past failed efforts have come close, but Gov. Josh Shapiro has been pressing lawmakers to get a deal done this year. In Wis., if adult-use legalization efforts fail, look for lawmakers to OK medical weed. Roadblocks remain in all three states. The devil is always in the details when it comes to marijuana bills, particularly regarding rules over retail sales. And it’s hard to change the status quo on big cultural issues, even when support is high. Meanwhile, antimarijuana groups are fighting hard against the bills.
Congress will likely act in time to avoid a looming government shutdown. But the situation on Capitol Hill remains dicey, with lawmakers struggling to agree on a strategy to keep federal agencies open past the March 14 deadline.
For now, intra-Republican squabbles are the biggest hurdle to overcome. Fiscal conservatives want additional spending cuts. Defense hawks have demands for more Pentagon spending. And Republicans from politically moderate districts are urging the rest of their party not to tinker with social safety-net programs. GOP leaders may need to enlist help from Democrats, a move they’d prefer to avoid, given that any deal with the Dems would require making big concessions. That’s a precarious path for party leaders, as some GOP hard-liners would balk. Things could get trickier if President Trump makes last-minute demands.
The Dept. of Agriculture is ramping up efforts to combat avian influenza, so far pledging $1 billion to provide farmers with free biosecurity audits and compensate those who are forced to euthanize their flocks. Moreover, the agency will import more eggs and explore different vaccines and therapeutics for chickens.
The ongoing bird flu outbreak has killed 166 million chickens since 2022 Also worrisome, it has infected nearly 70 people, one of whom has died, after crossing over from chickens and spreading to roughly 1,000 herds of dairy cows.
Average hospital occupancy rates are 11% higher than before the pandemic. The reason is not an increase in hospitalizations, but a decline in beds The average staffed-bed total has fallen from 802,000 in 2019 to 624,000 in 2024. Meanwhile, hospitalization rates have risen from 63.9% in 2009 to 75.3% in 2024. Without major changes in the hospitalization rate or existing bed supply…
The U.S. is on track for an adult hospital bed shortage by 2032. Some states will experience shortages well before then, as hospitals close or shrink capacity. Many for-profit health systems are shifting away from costly inpatient care to focus on lower-cost outpatient care, including things like ambulatory surgery. This increases the pressure, especially on the most desirable facilities, including high-quality urban and teaching hospitals, many of which are reporting that limited space has forced them to put patients in hallways and conference rooms.
Just how low will American-Ukrainian relations go? Under President Trump, the U.S. has paused military aid and curbed intelligence sharing with Kyiv, plus held meetings with politicians opposing Ukrainian President Volodymyr Zelensky. The White House will press hard in pursuit of a peace agreement with Russia. Kyiv has few friends to turn to and may have no choice but to strike a deal Europe has expressed solidarity, but will struggle to replace American military aid. Unless that changes, Washington will continue to have lots of leverage over Ukraine. Subscription inquiries and customer service: Call 800-544-0155; e-mail
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As global data and computation demands soar for artificial intelligence… Bigger spending on new submarine cables is on tap, especially on routes that cross the Atlantic. Meta recently announced a worldwide, 31,000-mile network. Amazon, Google and Microsoft also spend heavily on cables to meet rising demand for cloud computing, apps and the surge of AI usage. Top manufacturers of cables are Japan’s NEC, U.S.-based SubCom and France’s Alcatel Submarine Networks. Geopolitical tensions are raising concerns about subsea cable disruptions, including recent disruptions in the Baltic Sea and near Taiwan. The U.S. and others are on edge about Russia and China being behind the attacks. Other concerns: Cable repair ships navigating hostile waters, or unfriendly ships tampering with cables. Threats are rising, but the reality is less worrisome. Nearly all disruptions aren’t nefarious and the industry is skilled at undersea repairs and maintenance. There are about 150-200 breaks yearly, 80% caused by fishing vessels or anchors. The industry is urging the U.S. to speed up the lengthy approval process so that more cable can be laid faster, helping increase network redundancy. Applications can languish for years because multiple federal agencies have to weigh in. Some streamlining is possible, but it won’t be all the industry wants National security concerns are likely to complicate efforts to quicken the process.
Generative artificial intelligence will soon be inescapable for most workers AI features are being rapidly plugged into nearly all software. By next year, more money will be spent on software with generative AI than on software without it, according to tech market research firm Gartner. Spending on AI software in 2026 will be nearly $400 billion globally, compared with $282 billion on traditional software. By 2028, those figures will be $700 billion and $188 billion as AI gains more ground. The rapid deployment of AI brings both opportunity and risk for businesses. The fastest to harness productive uses will have an edge. But rushing in to use AI without a plan could cause damaging missteps, from wasted hours to security risks.
Fla.’s economy is poised to take a slight ding as fewer Canadians visit, in a backlash to President Trump’s tariffs and talk of acquiring the country. Canada is the top source of foreign visitors to the U.S., with 20.4 million visits in 2024, generating $20.5 billion in spending and supporting 140,000 U.S. jobs, says the U.S. Travel Assn. Of the 3.3 million visitors who flocked to Fla. last year, 2.2% came from Canada, a small but vital source of reliable tourism business. Canadian airlines are eyeing decreased Fla. service. Air Canada is saying it may cut capacity to Fla. soon if demand softens, but notes that the situation is fluid.
If visiting a national park this year, pack an abundance of patience You’ll likely find longer lines, shorter hours and service disruptions, stemming from the firing of 1,000 National Park Service workers across the U.S. The issue could be most acute at smaller parks, warn experts and park advocates. Visitors have already seen disruptions at the Grand Canyon and other popular spots. Though federal firefighters’ jobs appear safe, cutting 3,400 Forest Service jobs could affect national parks, too. Some of those let go worked on wildfire prevention. It’s possible that staff could be rehired, but there are no signs of that yet
Yours very truly,
March 6, 2025
THE KIPLINGER WASHINGTON EDITORS
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