As we wrap up 2024, it’s clear that it has not been a great year for home sales. High prices and stubborn mortgage rates kept many potential buyers out of the market.
Existing home sales have been below 2023 levels and are still far below where they were in 2019. The pandemic housing boom seems like a distant memory. As of August, home sales were down 4.2% year-over-year. Prices kept rising, with a median price of $416,700 marking 14 months of consecutive year-over-year price gains.
Will 2025 be more of the same or will lower mortgage rates stabilize the market, leading to more transactions?
Will Relief On The Mortgage Front Be Enough?
Mortgage rates are already at their lowest point in two years. That’s a welcome relief to many potential buyers, but so far, it hasn’t been enough to jump-start the housing market. There are several reasons for that. The first is that mortgage rates below 5% were common just a few years ago, and both buyers and sellers hope that those days will return. That will likely not be the case in 2025 unless there is a serious jolt to the economy.
The Mortgage Bankers Association is forecasting a drop to 5.8% for a 30-year fixed-rate mortgage in 2025. Fannie Mae’s latest prediction for the end of 2025 is 5.7%. These forecasts are subject to change and will be updated as new data comes in. Fannie Mae has predicted that home sales could go up by 9.8%.
If you plan to buy in 2025, you may want to start improving your credit score and researching mortgage lenders. Many people tend to start the homebuying process by looking at homes. By getting yourself mortgage-ready before beginning your search, you will be better positioned to make an offer if you find the right home.
Will First-Time Homebuyers Return?
With prices elevated in many markets and higher mortgage rates adding hundreds of dollars to the average monthly payment, first-time homebuyers retreated in 2024. The share of first-time homebuyers has fallen over the past decade as prices increased at a rate far exceeding income growth. In 1981, 44% of buyers were first-time homebuyers. Over the last several years, that number has fluctuated between 26% and 32%. People are buying their first homes later and are struggling to afford a down payment of 20%.
Housing policies could have a positive impact on the market. Both Presidential candidates have cited the need for more affordable housing and have said they are committed to raising the homeownership rate. However, any policy at the federal level will likely take a long time to implement and will not have a big impact on the 2025 housing market.
Will There Be Enough Homes For Sale?
We’ve looked at some of the factors that could impact housing demand, but one key question is supply. In 2024, one of the most interesting parts of the real estate market was the larger share that new home listings commanded in many markets.
New home listings are traditionally around 10% of the market but have been as much as 30% over the past two years because there hasn’t been enough inventory of existing homes for sale. Homebuilders also have an advantage over individual sellers. Many builders are affiliated with mortgage companies, which allows them to add in a mortgage buy-down to lower the rate a buyer will pay.
A balanced existing home sales market is considered to have six months of inventory. That means that there is enough inventory that there aren’t bidding wars that drive prices up, but that there aren’t so many homes on the market that they stay listed for a long time, causing desperate sellers to drop their prices.
In most markets over the past decade, sellers have had the upper hand because inventory has been around three months. Many buyers paid more than anticipated during the pandemic buying surge because competition was tight.
Inventory has risen in some markets, especially in Texas and Florida. However, most of the inventory increases have been because homes are staying on the market longer. There has not been a rising tide of new listings coming on the market. Most mortgage holders have a mortgage under 5%, which has caused what is known as the lock-in effect. Potential sellers are staying because they know if they move they will have a higher mortgage rate.
Could Home Prices Fall In 2025?
Overall, it seems unlikely that home prices will fall dramatically in 2025. Goldman Sachs has forecast that home prices will rise by 4.4%. The national numbers don’t always tell the whole story, and there are some markets where prices are starting to drop. There are also some markets where home prices may increase more. The California Association of Realtors believes that prices will rise by 4.6% in that state in 2025.
If the economy remains stable and unemployment is low, that should support the idea that prices keep a modest upward trend. However, if economic instability causes the rate of foreclosures and defaults to rise, that would change the forecast. The current rate of foreclosures is well below historical levels.
Overall, 2025 should be a more active market than 2024. Lower mortgage rates are expected to lead to more sales, but not at a dramatic level. Fannie Mae has forecast that 5.2 million homes will transact in 2025. The good news is that lower mortgage rates and a slower rate of price appreciation should improve what has been a challenging market for potential buyers.