Housing market predictions for 2025
Despite a robust labor market and strong wage growth throughout 2024, inflation remained a persistent headwind that sent the US economy into a vibesession–a term coined by economist Kyla Scanlon to describe a period of economic uncertainty where a lack of consumer confidence overshadows strong fundamentals.
But nowhere were the vibes more off than in the US housing market, where high mortgage rates did little to temper demand, instead adding to the pent-up frustration of would-be homebuyers and sellers. Home sale transactions came to a near standstill as buyers and sellers waited for a break that never came.
The good news is that the worst was likely behind us. Decades from now, economists of the future will point to 2024 as the norming year the housing market needed to reset after record-breaking home sales and appreciation from 2020 to 2022. While frustrations will likely carry over into the year ahead, falling mortgage rates by the end of 2025 are expected to trigger the critical shift needed to restore balance to the market.
After sharply cooling in 2023, the housing market spent most of 2024 in a stalemate. Major indicators of market health remained mostly unchanged from 2023, with modest improvements in supply, affordability, and mortgage rates.
Despite these signs of spring, the housing market’s winter persisted. Transactions continued to decline: Total existing home sales were down 3.5% in September 2024 compared to a year before5.
So, what gives? The root of the housing market’s woes is inventory.
It’s widely known that the US has not built enough homes to keep up with the pace of new households since the 2007 housing crisis and the global financial crisis that followed. New housing starts dropped to almost half of what they were pre-crisis and have been slow to catch up in the decades since. Experts currently estimate the housing shortage is between 4 and 7 million homes6.
But now, there’s an additional strain on supply: the “locked-in” effect. More than half of current homeowners have mortgage rates below 4%, and roughly three-quarters have mortgage rates under 5%7. This keeps many would-be sellers on the sidelines, reluctant to trade their low rates for new loans at today’s higher rates. Without these homes reentering the market, inventory remains strained, leading to slow turnover and pushing home prices back up.
While the inventory deadlock of 2024 has created significant challenges, it may also signal a turning point. Frustrated by limited options and rising prices, would-be homebuyers are increasingly vocal about their struggles, prompting homebuilders, financiers, and elected officials to take notice.
In response, new single-family home starts surged 5.5% in August and September 20248, compared to the previous year. This uptick, combined with the focus on housing reform in both presidential campaigns, has some real estate experts cautiously optimistic that the housing market’s most stubborn problem may soon see meaningful change.
The worst is likely behind us, but frustrations will continue in 2025 as the market struggles to get unstuck. As mortgage rates fall and get closer to the magic number locked-in homeowners are waiting for, fresh inventory is expected to kickstart the market.
Mortgage rates are projected to fall gradually throughout 2025 as the Federal Reserve nears victory in its fight against inflation and continues to lower federal funds rates. Economists and housing market experts expect the 30-year fixed rate to settle between 5.5% and 6% by the end of 2025, with Fannie Mae forecasting rates to average 5.9% in 20259.
If these forecasts hold true, mortgage rates may reach the thawing point needed to break the “locked-in effect” that has kept the market in a stalemate. More than half of homeowners say they would need a rate lower than 6% to consider buying a new home and selling their current one.10
Hopeful homebuyers who can’t wait for mortgage rates to fall below 6% to buy a home still have options. If you’re in this situation, you can plan to refinance when rates drop. With Orchard Mortgage, that process is even easier—our loans come with free refinancing for life.
Learn more about what affects mortgage rates.
Inventory is already on the rise as 2024 draws to a close, with a steady increase in the number of active listings and months' supply. Falling mortgage rates are expected to give inventory an additional boost in 2025, as more “locked-in” homeowners reach the point where they can sell.
However, the housing shortage is likely to persist until meaningful progress is made to compensate for the housing deficit. President-elect Trump has promised to open up tracts of federal land and reduce zoning restrictions for new housing developments;11 however, his proposed tariffs could push construction costs so high that developers are dissuaded from acting.
With limited supply and sustained demand, home prices are expected to grow modestly in 2025. According to forecasts from mortgage giants Freddie Mac and Fannie Mae, home values are projected to rise between 0.6%12 and 2%13, with most other projections falling within this range.
However, it's crucial to recognize that these predictions apply to national trends. In some areas, affordability challenges could lead to price declines, while high-demand regions – like Austin, Texas – may experience stronger price increases.
Buyers will be rewarded for their patience in 2025 as the market softens. Here are some tips to navigate the market in the year ahead:
The continued slowdown in the resale market has set the stage for new home construction to have another strong year. Some builders are offering financial incentives like rate buydowns to attract new buyers, making new construction homes more affordable for those who previously believed they were out of reach.
Keep an open mind about exploring different neighborhoods or areas you might not have considered before as inventory slowly increases throughout the year—they could hold hidden gems. Stay adaptable and ready to explore a variety of options, from fixer-uppers to move-in-ready properties, as flexibility can lead to unexpected opportunities.
You never know when your dream home will hit the market—make sure you’re ready to act fast by strengthening your homebuying power. Pay down existing debts to lower your debt-to-income ratio and boost your credit score, which can help you secure better mortgage terms in the future. Save aggressively for a larger down payment to reduce your loan amount and monthly payments. Being financially prepared will give you an edge when the right opportunity arises.
If you’re putting your house on the market in 2025, here are tips for how to make the most of your home sale:
Buyers are becoming increasingly discerning, so preparing your home to be move-in ready is crucial. Completing necessary repairs or renovations before listing—such as freshening up the paint, fixing broken appliances, or updating outdated features—can make a significant difference in buyer appeal. If tackling these improvements feels overwhelming, Orchard’s Concierge service can help by handling value-adding upgrades with no upfront cost to you.
Real estate trends vary significantly from region to region, so it’s essential to stay informed about the conditions in your local market. Work with a local real estate agent who has a pulse on your neighborhood to set a competitive asking price, market your home effectively, and understand buyer demand in your area.
With a mixed market in 2025, buyers may have more power to negotiate than they have in recent years. Work with your real estate agent to set realistic expectations and determine your bottom line. Being flexible with terms, such as offering to cover some of the buyer's closing costs, can make your listing more attractive and help facilitate a quicker sale.
Answers to your commonly asked questions about the year ahead:
Home prices are expected to grow throughout 2025 and into 2026. You may want to buy a home sooner rather than later for a lower sticker price. However, waiting for lower mortgage rates can increase your buying power and make your home more affordable.
Mortgage rates are expected to gradually decrease in 2025, reaching a low of 5.5% by the end of the year. However, the extent of the decline will depend on larger economic factors like inflation and the Federal Funds Rate.
A housing crash in 2025 is unlikely given the current demand for homes, a robust job market, and strong wage growth, but regional markets could still face challenges. While mortgage rates and affordability issues may continue to weigh on demand, broader economic conditions suggest the market will stabilize rather collapse.
References:
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