No sign of normalcy lies ahead for the 2025 housing market, according to First American Deputy Chief Economist Odeta Kushi’s latest forecast. The five major predictions include the trajectory of mortgage rates, home prices, inventory, home sales, and the new construction market.
In 2024, mortgage rates remained above 6% and kept affordability constrained, despite the Federal Reserve beginning its rate-cutting cycle in September. The average pace of existing-home sales struggled to exceed 4 million as well, while national housing inventory remained historically low.
“The 2025 housing market is poised to make strides forward – offering progress, but still far from perfection,” Kushi stated.
The pandemic housing market sent the entire country ablaze with homes purchases and refinances selling like hot cakes. In 2025, however, the theme will shift towards more localized market dynamics, according to First American’s outlook. Markets with more building and inventory will experience greater affordability relief, which is expected to allow for increased sales. Mortgage rate volatility will persist until the Fed’s policy outlook becomes clearer, and the mortgage rate lock-in effect will prevent a full housing market recovery.
Overall, the 2025 housing market is expected to bring more significant headwinds preventing a return to “normal.”
Mortgage Rates Remain Above 6%, But Affordability Improves
The Fed began its rate-cutting cycle in 2024, but sticky inflation and a resilient economy may prompt a pause in rate cuts early this year.
Most likely 2025 will see the economy and labor market continue to cool, but not collapse. And, if the Fed’s own projections are correct, Kushi believes the industry may see up to two rate cuts in 2025, down from the four previously projected in September 2024.
While the Fed maintains a higher-for-longer stance, mortgage rates will likely remain above 6%. However, rates may drift lower from 2024 levels, if the mortgage rate spread narrows as the Fed’s policy outlook becomes clearer.
A resilient labor market is expected to keep wage growth positive, while nominal house price appreciation moderates. This dynamic could allow nominal wage growth to exceed house price growth. Slightly lower rates alongside positive wage growth could result in modest improvements in affordability.
House Prices to Moderate, but Remain Positive Nationally
House prices across the United States continued to rise in 2024, according to First American Data & Analytics’ November 2024 Home Price Index. However, the rate of growth slowed to a steady 3.9%. As the housing market adapts to higher mortgage rates, both buyers and sellers are gradually re-engaging, supported by a robust labor market and increased housing inventory compared to the previous year. This shift has resulted in consistent, single-digit price growth, signaling a return to more typical market conditions following the volatility of the pandemic and its aftermath.
Data indicates that house price growth is inversely related to total months’ supply. Historically, six months of supply aligns with moderate price appreciation, while lower supply levels tend to accelerate price increases. Although total months’ supply improved in 2024, it remained below five months, maintaining upward pressure on prices. Projections for 2025 suggest a modest increase in supply, though not enough to reach historical norms. If this relationship persists, house price growth is expected to remain positive, aligning with historical averages of 3 to 4%.
Inventory Remains Historically Low
The conclusion of 2024 brought some improvement in housing inventory, with both new and existing-home stock increasing. Analysis shows that inventory turnover—the total inventory of existing homes for sale relative to the number of households—historically averages 2.5%, meaning 250 homes per 10,000 households are typically on the market. Inventory turnover began in 2024 at 1.2% and rose to 1.3% by year’s end, driven by new and existing-home inventory growth. This uptick was more prominent in Sun Belt markets such as Florida and Texas, where homeowners appeared more comfortable listing their properties despite higher mortgage rates.
While a slight improvement in inventory is anticipated if mortgage rates moderate in 2025, persistent affordability challenges and the “mortgage lock-in” effect—where homeowners with low-rate mortgages are disincentivized from selling—will likely prevent a return to pre-pandemic inventory levels.
Existing-Home Sales to Improve but Remain Below Historical Norms
The inventory of existing homes has been trending upward, and mortgage rates are expected to decline modestly in 2025. Additionally, pent-up demand remains significant among both first-time and repeat buyers. From 2022 to 2024, the cumulative pace of existing-home sales fell approximately 3 million short of the pre-pandemic five-year average of 5.4 million sales annually (seasonally adjusted annual rate). While the mortgage lock-in effect will hinder a full recovery, a gradual improvement in existing-home sales is expected in 2025, contributing to progress toward a balanced housing market.
New-Home Market Likely to Outperform
The inventory of new homes for sale reached its highest level since 2007, while the supply of existing homes remains near historic lows. This disparity is largely attributed to the "golden handcuffs" of low mortgage rates, as more than 80% of mortgaged homes have rates below 6%, discouraging homeowners from selling. Homebuilders, unencumbered by these constraints, are well-positioned to address market demand. They have employed various strategies, such as mortgage rate buydowns and price reductions, to attract buyers. According to the National Association of Home Builders, 31% of builders reduced home prices in December 2024, with an average reduction of 5%, and 60% offered sales incentives.
The performance of the new-home market will vary geographically, with single-family home construction concentrated in Sun Belt regions. In markets with limited existing-home inventory, newly constructed homes, coupled with buyer incentives, are expected to remain an appealing option for prospective homeowners.
