In 2024, the housing market witnessed one of its slowest sales periods in three decades. However, as we move into 2025, experts anticipate a gradual improvement. Despite persisting challenges such as high mortgage rates and record-high home prices, there are signs that both buyers and sellers are adapting to this new reality. The housing market has been stagnant since mortgage rates began rising sharply in 2022. Yet, life events like births, deaths, marriages, divorces, and job changes continue to drive movement, potentially easing the "lock-in effect" and sparking more price competition.

Unlocking Potential: A Year of Incremental Progress

Market Dynamics Shift Amid Higher Rates

The housing market has faced significant headwinds over the past few years, primarily due to soaring mortgage rates. In 2022, when rates started climbing rapidly, homeowners who had previously secured loans at around 3% were hesitant to move, fearing the financial impact of higher interest rates. This reluctance led to a slowdown in transactions, creating what many economists describe as a "lock-in effect." However, as we enter 2025, there are indications that this trend may begin to shift.Real estate professionals across the country are reporting early signs of increased activity. For instance, Scott Pratt, a realtor based in Buford, Georgia, noted that while business was sluggish for much of 2024, he expects to see more inventory hitting the market this spring. Pratt believes that as the year progresses, buyers might find better deals, especially if sellers adjust their prices to reflect current market conditions. "It's going to be a challenging year, but by the end, some homeowners who initially thought they'd stay put forever may finally decide to move," he explained.

Affordability Remains a Major Concern

One of the most pressing issues facing the housing market is affordability. Median home prices have surged by about 30% compared to pre-pandemic levels, outpacing income growth during the same period. This disparity has made homeownership unattainable for many prospective buyers. Additionally, higher mortgage rates, increasing insurance premiums, and elevated property taxes have further complicated the situation.Danielle Hale, chief economist at Realtor.com, highlighted that any uptick in transactions is likely to remain below historical averages. "We expect existing home sales to rise by only 1.5% in 2025, reaching approximately 4.07 million units," she said. This figure is significantly lower than the average of 5.28 million homes sold annually between 2013 and 2019. The ongoing affordability crisis means that recovery will be a slow climb, with potential fluctuations along the way.

Mortgage Rate Volatility and Its Impact

Mortgage rates are expected to experience volatility throughout 2025, starting with a decline, followed by a rise, and then another fall. According to Orphe Divounguy, senior economist at Zillow, this pattern is typical for most years but is exacerbated by uncertainties surrounding the presidential transition and the Federal Reserve's rate-cutting cycle. "While we anticipate rates to end the year below current levels of around 6.7%, there's no guarantee," Divounguy cautioned.Realtor.com projects an average rate of 6.3% for 2025, while Redfin anticipates fluctuations but expects the average to remain close to 6.8%. Walter Franco Jr., a real estate agent in Los Angeles, noted that even slightly lower rates might not be enough to spark significant activity in high-end markets. "Buyers looking for homes priced between $1.5 million and $2 million aren't very sensitive to rate changes, but those seeking more affordable options are heavily impacted," he observed.

Regional Disparities in Housing Market Performance

The strength of the housing market varies significantly by location. Nationally, economists predict home prices to increase between 2% and 4% in 2025, aligning with historical averages. However, the most expensive markets along the coasts are poised for larger gains due to limited new construction and an abundance of wealthy buyers benefiting from stock market gains.Conversely, cities in Florida and parts of the Southeast and Midwest may not experience such robust growth. Florida's condo market remains in crisis, with owners grappling with heavy repair bills following the 2021 Surfside collapse. In less-prosperous areas, home prices could remain flat or even decline as lower-income earners struggle to afford homes. Lisa Sturtevant, chief economist at Bright MLS, emphasized that the housing market tends to favor those with greater financial resources. "Those who are already advantaged will continue to benefit, while those with fewer resources will face ongoing challenges," she stated.

Economic Policies and Their Influence on the Housing Market

The incoming Trump administration's economic policies add another layer of uncertainty to the housing market. Proposals like tax cuts and tariffs could exacerbate inflation, leading to prolonged elevated interest rates on mortgages and other products. On the other hand, deregulation efforts aimed at reducing barriers for homebuilders could help increase supply and potentially lower prices.Jon Benya, a real estate agent in Waldorf, Maryland, expressed concerns about the potential impact of proposed federal government restructuring on local markets. "If certain agencies are relocated away from Washington, it could create job insecurity, making it difficult for people to consider moving or buying a new home," he said. Perception plays a crucial role, and any hint of instability can deter potential buyers and sellers from entering the market.