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The last few years have been painful for would-be home buyers. House prices have soared, driven in part by limited supply. Mortgage rates reached 20-year highs and sky-high inflation only exacerbated things.
If you're hoping our housing market predictions will promise a swift end to the pain, I'm afraid you'll be disappointed. 2025 will bring small changes and a shift toward improved affordability. But significant change will take time.
Here are three housing market predictions for 2025.
1. Mortgage rates will fall further
Now that the Fed has finally started to cut rates, those cuts will likely continue through 2024 and into 2025. While the Fed rate cuts aren't directly connected to mortgage rates, they do have a big influence. Estimates vary on how far mortgage rates will fall.
According to Realtor.com, the Mortgage Bankers Association thinks average 30-year fixed mortgage rates could fall to 5.90% by Q4 2025. Wells Fargo estimates they'll drop to 5.55%. Even a fraction of a percent can affect your total mortgage costs by tens of thousands of dollars.
What it means for you
The low rates we saw during the pandemic were extraordinary and -- unless there's another dramatic global crisis -- we're unlikely to see them again. Rather than hoping for the return of super-low rates, look for ways to qualify for the lowest rate you can.
Focus on your credit score. Make sure you pay your bills on time and try to keep your credit utilization ratio low. Save aggressively so you can build the biggest down payment possible. And shop around to find the best mortgage lender for you.
2. Home prices will rise
There are conflicting predictions about how much house prices will rise next year. Analysts at Goldman Sachs believe they will increase by 4.4% in 2025. Fannie Mae's Home Price Expectations Survey predicted price growth of 3.1%.
Lower mortgage rates will almost certainly encourage buyers. What's less clear is whether sellers will come to the party. That's important because low housing inventory is one reason prices are so high. Having more buyers competing to buy a small pool of properties could drive prices up.
However, some analysts believe we'll see more properties for sale. There's a large swathe of people who've essentially been locked in by incredibly low pandemic mortgage rates. Falling rates could give them the impetus to sell, which would ease pressure on inventory. It will also be less costly for builders to borrow to build more properties.
What it means for you
Many potential buyers are on the sidelines right now, waiting for mortgage rates to fall further. If you can't find a property that's right for you at a price you can afford, it makes sense to hold off and see if rates and inventory improve.
Equally, there are no guarantees that things will improve dramatically in 2025. So if you're well-positioned financially, with a mortgage pre-approval and down payment at the ready, there are good reasons to go ahead. Especially if you've found a property that's right for you
3. Affordability will ease a little
At one point last year, a typical U.S. household could only afford 16% of the homes that were on sale. Redfin says that's the lowest it has ever been. Salaries, rates, and house prices all play a part in affordability. But the tide is starting to change.
Redfin tracks the income needed to buy the average U.S. home. In September, that figure fell to $115,000 -- the first drop since 2020. Sadly, that's still considerably higher than the $84,000 earned by a typical household.
It will take time for those dramatic pandemic-induced swings to right themselves. Still, Terry Loebs, founder of Pulsenomics, told Fannie Mae he is hopeful. "A slowdown in home price growth and easing mortgage rates offer a glimmer of hope that the peak of the housing affordability crisis may be behind us," he said.
What it means for you
If you've been trying to buy a home, it probably feels like the deck is stacked against you. On top of the huge costs of buying, high rents make it harder to save for a down payment. The odds might finally be moving in your favor.
Save as aggressively as you can so you're in a good position to make the most of any market shifts in 2025. Having a big down payment and excellent credit can help you score a lower mortgage rate. If you can take on extra hours at work or a side hustle, that could help reduce the affordability gap.
There are also loan programs designed for low-income households. These include FHA and USDA loans with low (or no) down payments and more flexible loan requirements. The downside is that you'll have to pay extra private mortgage insurance and there can be strict appraisal requirements.
Don't expect dramatic changes in 2025
Buyers and sellers are still reeling from what has been a rollercoaster housing market ride in recent years. Next year offers some light at the end of the tunnel, affordability-wise, particularly as mortgage rates are starting to come down. But it will take time. Focus on your financial situation so you can qualify for the best possible home loan when the time is right.
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