The housing industry has been struggling in recent years due to rising property prices and high mortgage rates, leaving many optimistic homebuyers ready to get off the sidelines and into a home.
Fortunately, housing market circumstances have eased marginally in recent months, and they are expected to soften further in 2025 now that the Federal Reserve has begun to lower interest rates. If you're looking to purchase or sell soon, here's what you should know about home market estimates for 2024 and 2025, as well as how to prepare.
Overview of the Housing Market
According to Zillow, the average house value in the United States is $361,282, a 2.9% increase over the previous year. Last month, the average 30-year mortgage rate fell to 5.74%, the lowest it has been in more than two years. Rates have increased slightly in recent weeks, although they remain quite low.
Despite the recent easing of mortgage rates, the housing market continues to face significant challenges. The persistent shortage of affordable housing options, particularly in urban areas, has led to increased competition among buyers and inflated prices in many regions. This trend has disproportionately affected first-time homebuyers and middle-income families, who often find themselves priced out of desirable neighborhoods and forced to consider alternatives such as longer commutes or smaller living spaces.
Mortgage rates have risen in recent years, while property prices have continued to rise, posing an affordability challenge for homeowners. The high cost of buying a new house has kept many would-be home sellers out of the market, further limiting an already scarce housing supply.
Overall, it has not been an easy few years for prospective homeowners, particularly first-time homebuyers, who frequently have less purchasing power and benefit the most from reduced mortgage rates and steady housing prices. But affordability has gradually increased as mortgage rates have fallen, and they may fall much lower next year.
Key elements that influence housing market trends
Macroeconomic influences, new house development patterns, and current mortgage rates all have an impact on the housing market.
The economy, mortgage rates, and a scarcity of homes are currently among the most powerful variables driving the housing market.
The Economy and Federal Reserve Policy
As inflation reached historic highs in 2022, the Federal Reserve began aggressively boosting the federal funds rate in an effort to bring it back down. This contributed to higher mortgage rates.
Since then, inflation has slowed dramatically, with the consumer price index reaching just 2.5% year on year in August 2024, down from 9.1% in June 2022. Because inflation has slowed so dramatically, the Fed has begun to drop its benchmark rate, decreasing the federal funds rate by 50 basis points at its September meeting. And rates are projected to be slashed more this year.
Though mortgage rates do not exactly track the federal funds rate, they frequently trend upward or downward depending on how investors expect Fed decisions will affect the overall economy.
The Federal Reserve's policy decisions have far-reaching implications beyond just the housing market. As interest rates fluctuate, businesses and consumers adjust their spending and investment behaviors, which can lead to shifts in employment rates, wage growth, and overall economic stability. These factors, in turn, influence potential homebuyers' confidence and ability to enter the market. Economists and policymakers are closely monitoring these interconnected elements to gauge the long-term impacts on housing affordability and economic growth.
Mortgage Rates
Even though mortgage rates have been falling for several months, homebuying demand has yet to increase. Some potential buyers may simply be unable to afford to buy at current interest rates, while others are waiting for rates to fall more so they may save money or boost their purchasing power.
High mortgage rates can sometimes serve to put downward pressure on property prices, or at least slow their rise. However, because the United States has too little housing availability, home prices have risen in recent years.
Low Inventory
A new Zillow research discovered that the United States is 4.5 million houses short of a healthy housing supply. When a housing market does not have enough dwellings to suit the demands of its residents, home prices and rents rise.
Housing Market Forecasts for 2024 and 2025
Mortgage rates have decreased significantly this year and are expected to fall further in 2025, improving borrowers' affordability. But this will result in increasing demand. This will keep housing prices high, perhaps pushing them further higher in 2025. Finding a property in your price range may become even more difficult, and you may have to make many offers on homes before one is approved.
Home Price Predictions
Experts predict that housing prices will continue to rise, although at a slower rate in 2025.
Fannie Mae expects home prices to rise 6.1% year on year by the end of 2024. In 2025, house price growth may drop to 3% per year.
The Mortgage Bankers Association predicts that prices will climb 3.9% this year. By 2025, it expects price growth to decelerate to 2.7% per year.
The National Association of Realtors expects existing-home values will rise 3.8% overall by the end of 2024, but only 2% year on year by the end of 2025.
While these predictions offer a general outlook for the housing market, it's important to note that regional variations can be significant. Factors such as local job markets, population growth, and development policies can greatly influence housing trends in specific areas. For instance, some rapidly growing cities in the Sun Belt region may experience more robust price increases and demand compared to slower-growing areas in the Rust Belt. Potential homebuyers and investors should consider these regional differences when making decisions about where and when to enter the market.
Mortgage Rate Predictions
Mortgage rates have fallen significantly recently, with 30-year rates going below 6% for the first time since early 2023, according to Zillow statistics.
Mortgage rates may not fall much more this year, as economic conditions have remained solid and future Fed cuts have already been factored in. However, interest rates are expected to fall by 2025.
Housing Inventory Forecast
For housing market conditions to improve, housing supply must be increased. As mortgage rates fall, more sellers will enter the market and list their houses, boosting the amount of for-sale properties available.
In terms of new house development, Fannie Mae anticipates the number of housing starts to fall 5.8% this year but rise 1.4% the next year, driven mostly by multifamily home construction. The MBA predicts that starts will climb 4.4% in 2025 and 1% in 2026.
Is it correct that there will never be a good moment to buy a home?
There is a lot of negativity around homebuying, which has caused many prospective purchasers to commit themselves to a life of renting. While purchasing a house is undoubtedly more expensive than it was in the past, there are still chances for people to become homeowners, especially with the proliferation of first-time homebuyer mortgages and down payment assistance programs in recent years.
You may now acquire a mortgage with just 1% down and use down payment and closing cost assistance to reduce the amount of cash required to buy a property.
Furthermore, while home prices are unlikely to fall considerably, mortgage rates will. The lower your mortgage rate, the more you may borrow, increasing your purchasing power even when property values grow.
As builders add more home supply over time, price hikes should slow, and buyer rivalry should relax. However, it may be several years before we begin to see the impacts of this.
Is today a good time to purchase a house?
Whether now is a good time to purchase a property is determined by a variety of factors, including current mortgage rates, local housing market circumstances, and your own financial status.
Mortgage rates are low, so now might be an excellent time to buy a home if you can afford it. You may also want to speak with a real estate professional about the current situation of your local home market. If your area offers a large number of available properties in your price range and low competition, purchasing now might provide you with a fantastic value.
What Home Sellers Should Know About the Current Housing Market
Many would-be sellers who are hanging onto historically low mortgage rates have abstained from selling their houses this year since rates have risen so significantly. However, when mortgage rates fall, giving up their present mortgage will become less of an issue.
If you're thinking about selling, things may improve in 2025. Mortgage rates are expected to fall much more, increasing demand and making it simpler to sell your property for the full amount (or more).
When will the'silver tsunami' affect house prices?
Even if mortgage rates fall, homebuyers will continue to face a shortage of available homes. However, situations may change in the future years due to the so-called "silver tsunami," which refers to the prospective effects of a rising number of baby boomers aging out of their present houses.
How the'silver tsunami' may impact first-time homebuyers
Baby boomers are now hanging onto a large amount of real estate. However, when they age and pass away or move into long-term care facilities such as nursing homes, more and more of their real estate will be put back on the market. Because those seniors are not looking to buy another home to replace their present one, this creates fresh housing supply that did not exist previously.
This might make it simpler for first-time homebuyers and other cash-strapped borrowers to purchase a property by reducing competition and allowing prices to increase at a more normal rate. However, it may take several years before we see the results of this.
The concept of the 'silver tsunami' has sparked debates among housing experts and policymakers. While some view it as a potential solution to the housing shortage, others caution against overestimating its impact. Factors such as improved healthcare allowing seniors to age in place longer, and the tendency for baby boomers to downsize rather than completely exit the housing market, could mitigate the expected influx of available homes. Additionally, the geographic distribution of this demographic shift may not align with areas of highest housing demand, potentially limiting its effect on overall market dynamics.
How to Prepare to Purchase a Property in 2025
If you want to purchase a home soon, here's what you should do to prepare.
Get your funds ready
Making sure your finances are in excellent order will help you get the greatest mortgage rate available, regardless of how average rates are moving.
One of the quickest ways to improve your credit score is to reduce your credit use. This will also lower your debt-to-income ratio, which is another element mortgage lenders analyze when determining what rate to offer you.
J.R. Russell, Citi Mortgages' director of direct to consumer mortgage finance, suggests that homebuyers consider paying down credit card bills to enhance their credit ratings.
"If you're trying to pay off or pay down some credit cards, start with the cards or credit lines with the highest interest rates first," according to Russell. "Then pay off the smallest balances. The good news is that doing this can help you reduce your debt and enhance your credit score."
Look for low mortgages and other first-time homeowner programs
In 2024 and 2025, many purchasers will be able to afford homeownership by combining first-time homebuyer mortgages with grants or other types of down payment help.
"If you're not sure that your down payment will be sufficient, take time to understand all of the available products that you may be eligible for through the FHA or VA, your bank, or other local institutions," according to Russell. "These programs may grant you access to down payment assistance and low-to-moderate income programs, among other game-changing resources."
Conventional loans allow for down payments as little as 3%, whereas FHA loans need a 3.5% down payment. USDA and VA loans do not require a down payment.
Look into lenders who provide customized mortgage packages with added benefits. Rocket Mortgage, for example, offers a ONE+ mortgage that requires consumers to pay down only 1% while the lender provides a 2% subsidy.
Bank of America, another popular lender for first-time homebuyers, provides many types of down payment and closing cost help.
Time your buy correctly
The optimal time to buy is determined by each buyer's priorities, so find out yours.
If getting the lowest possible rate is your first priority, keep a watch on how rates and the economy are moving. Rates are likely to reduce in 2025, and inventory should increase, offering you more options. However, you will most likely face increased competition.
Purchasing during the offseason, such as the fall or winter months, might help you avoid competition and negotiate a lower price. However, inventory is limited at this season, making it more difficult to find a property that meets your criteria.
But do not haste
"Don't put pressure on yourself to make any potentially hasty decisions on what may be your biggest asset and the largest financial decision of your life," according to Russell.
If you don't feel ready to buy in 2024 or 2025, there's nothing wrong with waiting a little longer to save and build your credit.
Increase your savings
If you want to purchase a home soon, it's critical to save some extra money now, whether it's for a down payment or an emergency fund.
When purchasing a home, you'll need enough cash to cover both the down payment and closing expenses, which can range from 3% to 6% of the loan amount. While many mortgage programs allow for minimal down payments, the more you can put down, the lower your interest rate will probably be. Furthermore, proposals with greater down payments are frequently more appealing to house sellers, offering you a competitive advantage in what will undoubtedly be a difficult market.
Homeownership is also frequently more expensive than many first-time buyers anticipate, particularly in the first year. Having some extra money set up for unforeseen bills will assist you avoid going into debt when your first major home expense arises.
