The September housing report from the National Association of REALTORS® (NAR), released at the middle-end of October 2024, found that year-over-year housing sales volume is down 3.5%, housing prices rose 3%, mortgage interest rates were lower to 6.44% from 7.63% a year ago and housing supplies have increased 23%. Inflation is easing and wages are rising. Most market conditions are finally moving in homebuyers’ favor.
Yet, some homebuyers are still reeling from spikes in the cost of living. They, along with home sellers, maybe watching for mortgage interest rates to fall further. And some may simply believe that buying a home in 2025 will be more advantageous.
What do housing experts believe the housing market will do in 2025?
Household Formation
Households, whether composed of one person, a couple, or several generations of family members, are the beating heart of the housing industry because they drive demand. Household formation has averaged 1.19 million per year over the past 30 years, according to the bipartisan Congressional Budget Office (CBO).
The burgeoning financial crisis of 2007-2009 was severe enough to reduce household formation to 0.92 million annually between 2004 and 2013. By 2014, growth in household formations rebounded to about 1.50 million annually.
The fact that households continued to form during the Great Recession and beyond helped put supplies in a bind by 2014. Between 2010 and 2020, single-family home construction totaled 6.8 million units, far below the 9.3 million units built in the 1960s to 12.3 million homes built in the 2000s.
As of June 2024, household formation was 1.349 million year-to-date but is anticipated to be weaker over the next decade due to boomers aging and passing on, and slowing immigration, among other reasons. If formation slows even a little, it will help increase the availability of homes to rent or buy.
New Homes and the Availability of Property to Buy
The problems facing builders were and remain numerous strict monetary policies, slow demand by skittish homebuyers, the high cost of building materials, and a severe shortage of labor brought on by the furloughing of sub-contractors during the housing crisis. Perhaps the number one deterrent to the industry is restrictive single-family home zoning that prevents multi-family homes from being built three-quarters of land zoned residential in the U.S. is zoned for private, single-family homes.
According to Realtor.com, there were 17.2 million household formations between 2012 and 2023, but only 13.4 million housing units were completed. Because of the slow rate of new home production, U.S. housing supplies aged to a median of 40 years of age, as of 2022. Of owner-occupied homes, about 60% were built before 1980, with around 35% built before 1970. High demand for homes is keeping older homes in service to the point that only six out of 1,000 homes built before 1970 have been removed from housing supplies, says The National Association of Home Builders (NAHB).
Overall housing starts decreased 0.5% in September to a seasonally adjusted annual rate of 1.35 million units, but new single-family home productions are up 10.1% year-to-date. Multifamily housing starts, including apartments and condos, slowed by 9.4% in September, falling to an annualized rate of 327,000 units the lowest level since May. This decline contrasts with a high pace of multifamily completions, which reached an annualized rate of 680,000 units in September, roughly double the rate of new starts. Builders may be slowing down on new multifamily projects as a large number of units are being completed and entering the market.
The October 2024 NAHB-Wells Fargo Housing Market Index shows that homebuilder confidence is rising due to slowing inflation and lower interest rates. This is supported by the CBO, which forecasts that housing starts in the next 10 years will reach 1.68 million units per year from 2025 to 2029.
Home Prices and Affordability
Goldman Sachs research into US home prices suggests that home appreciation will end 2024 at 4.5% and expects home prices to rise another 4.4% in 2025. Researchers say that if the US were losing jobs, rising home prices would be an issue, but they’re close to historical home appreciation numbers of the past several years.
At 4.5%, home prices are currently appreciating faster than inflation rates (2.4%), points out AmericanFinancing.net. With the exception of 2020 and 2021, when home prices spiked 18% due to low interest rates and supplies, homes appreciate about two to three percent annually. As long as wages continue to increase (up 4.6%) faster than inflation, affordability will improve incrementally. Otherwise, home prices would have to drop 20% to be affordable in today’s market.
Realtor.com estimates that the U.S. housing shortage of the last decade is between 2 and 7 million homes. Competition for homes has led to cost burdens for home buyers who are currently spending more on housing (over 30%) than conforming lending guidelines recommend (28% or less of gross income, 25% for mortgage).
Mortgage Interest Rates
Higher mortgage rates have been a problem for both buyers and sellers. Buyers have to qualify for more expensive mortgages, and sellers are reluctant to list their homes for sale, exacerbating the housing shortage. Explained Morgan Stanley, October mortgage rates were about 6.1%, a boon to buyers, but more than 80% of current mortgage holders have interest rates that are 2.5% lower. Sellers don’t want to lose low their interest rates in order to buy a home with a much higher mortgage cost.
That could change dramatically in 2025, as experts are forecasting lower rates in 2025:
- Fannie Mae anticipates mortgage rates will drop into the 5% range in 2025, ending 2025 at 5.7%.
- The Mortgage Bankers Association believes that mortgage interest rates will end 2024 at around 6.20% and drift downward to end 2025 at 5.8%.
- NAR’s outlook is 2024 ending with interest rates at 6.1%, and declining to 5.8% by the end of 2025.
- NAHB predicts that rates will end 2024 at 6.64%, and fall to 5.86% in 2025.
Conclusion
Lower rates would not only make homes more affordable for homebuyers, but they could release locked-in home sellers to list their homes on the market. With greater supply, prices will rise only moderately in 2025, according to Business Insider:
- Fannie Mae sees home prices ending 2024 at 6.1% higher, year over year, and that price growth could slow to 3% in 2025.
- The Mortgage Bankers Association believes prices could rise 3.9% by the end of 2024, and moderate to 2.7% in 2025.
- The National Association of REALTORS® (NAR) thinks existing home prices will increase 3.8% overall by the end of 2024, and moderate to just over 2% in 2025.
It’s unlikely that housing prices overall will decline, but some areas that experienced explosive growth during the pandemic may see price cuts as more home supply comes onto the market.
