As the end of the year approaches, it has become a tradition to discuss the upcoming trends in the U.S. real estate market for the next year. The past year has been full of challenges for everyone, with anxieties about when interest rates will drop, hopes for increased housing supply, and the general uncertainty prevailing throughout. Unfortunately, these wishes have not materialized as expected, with only slight improvements seen at certain times. Will 2025 bring us a better turning point? Can we look forward to the next year?
2025 is on the horizon, yet the U.S. real estate market is fraught with contradictions, leaving many people feeling perplexed. Mortgage rates, leasing models, homeownership dreams, and housing trends across the nation appear to be in conflict, creating both opportunities and uncertainties.
The current housing market presents a complex landscape, with the tension between renting and buying more apparent than ever before, highlighting the market’s imbalance due to regional differences in housing demand. As 2024 comes to a close, the following four housing market contradictions are likely to persist as we head into 2025, possibly exacerbating further.
While many experts predicted that mortgage rates would gradually decrease in 2025 due to interest rate cuts, the rates have surprisingly continued to climb since the cuts. By the end of October 31, the 30-year fixed-rate mortgage had reached 7.09%.
Although inflation data has cooled down, and the Fed is expected to continue cutting interest rates in 2025, the strong performance of the U.S. economy has slowed down the pace of future rate cuts. Current mortgage rates have already factored in expectations of a series of rate cuts by the Fed next year, raising bond yields due to positive economic prospects, thereby indicating that mortgage rates may not fall further.
Goldman Sachs analysts believe that the real importance of interest rates lies in the extent to which they deviate from expectations set by the Fed. Expectations versus actual rate cuts will play a crucial role in determining whether rates might further decrease. In the current relatively robust U.S. economy, increasing the magnitude of rate cuts is unlikely, which could prevent a significant drop in rates. Therefore, mortgage rates are likely to remain around 6% in 2025, reflecting a contradicting phenomenon of the Fed’s slow rate cuts.
In major cities and suburban markets, renting has become more common and is often the only viable option for people who cannot afford homeownership due to steep prices.
Renting provides flexibility, reduces financial burdens, and alleviates property tax, home maintenance, and insurance responsibilities. Consequently, an increasing number of people are opting for long-term rentals, with approximately 34% of U.S. households renting in 2024.
However, despite the rising proportion of renters, homeownership remains the gold standard for achieving the American dream of success. While the costs of homeownership are escalating, and it comes with numerous responsibilities, the satisfaction of accumulating wealth through property ownership has always been a dream for many.
Entering 2025, in today’s fast-paced, highly mobile society, many people are placing greater importance on the flexibility offered by renting. However, owning a home is still perceived as a symbol of success, stability, and financial security. The escalating housing costs have intensified the conflict between renting and buying.
On the other hand, renting is often seen as an uneconomical choice since monthly rent payments do not contribute to long-term wealth building. Nonetheless, becoming a homeowner today comes with significant financial burdens, such as high upfront costs including down payments and closing fees, as well as ongoing expenses like maintenance, property taxes, insurance, and unexpected repairs. According to a financial firm, Ally Financial Inc., the average annual cost of homeownership, excluding mortgage payments, amounts to $18,000.
In contrast, renters avoid homeownership costs and gain flexibility to seek better job opportunities or lower living expenses through moving. For some individuals, this flexibility opens up new avenues for wealth creation. Conversely, homeowners may find themselves stuck in their current homes due to the so-called “lock-in effect,” preventing them from moving freely. Thus, such contradictions are likely to persist in 2025.
While many markets have long been plagued by housing shortages and low inventory, some face challenges of oversupply and stagnant sales. In high-demand markets like California, New Jersey, and Washington, finding available homes for sale, especially affordable and entry-level properties, is extremely competitive. In September, the median home price in California rose by 6.5% from the previous quarter to $886,560.
In contrast, Florida is grappling with issues arising from hurricane damages, leading to increased insurance premiums that may turn homeownership into a liability rather than an asset. A recent report by the Florida Policy Project revealed a 45% surge in insurance rates in the state from 2017 to 2022.
The havoc wrought by Hurricane Helen in Florida in October resulted in private insurance losses of $6 billion, prompting many Floridians to reassess the costs of homeownership. Therefore, while some states have high demand for buying homes, homeowners in others face insurance burdens, waning buyer interest, exacerbating regional imbalances in the U.S. This presents a contradiction between hot-selling and stagnant markets that will have to be addressed in 2025.
Even in high-demand regions of the U.S., selling homes is not as easy as it may seem. While there may be a decent number of offers on listed homes, the frenzy to buy has considerably subsided. According to a recent report by Zillow, although the median number of offers on listed homes remains at 2, those receiving 4 or more offers have decreased. This serves as a reminder to sellers that even in a hot market, selling a home may be more challenging than anticipated, with stricter buyer scrutiny, loan difficulties, and increased competition from other sellers.
Given this predicament, approximately two-thirds of sellers, according to the same Zillow report, have at least considered renting out their homes instead of selling. Especially among younger sellers, renting out a property is seen as an alternative, creating cash flow and waiting for potential appreciation in home value. The age groups of 18 to 29 and 30 to 39 have the highest proportions of individuals considering renting out their homes, at 82% and 83%, respectively. The decision between renting out or selling a home may pose a dilemma for sellers, necessitating considerations of local market conditions and their own financial situations when making a choice.
It should be noted that the above discussion is based on the recent development of the U.S. housing market over the past two years, and any changes in mortgage rates could lead to different outcomes, hence, it is for reference purposes only.
2025: 4 Contradictions and 5 Key Issues in the U.S. Real Estate Market # U.S. Real Estate Hotspots
Next, there are 5 more crucial questions that many may want to delve further into.
This is not a simple matter of buy or don’t buy. In fact, in 2024, many prospective homebuyers chose to wait and see, hoping for a more favorable market in 2025. However, the continuous rise in home prices and tight supply suggest that 2025 may still be a challenging period for buying a home. Nevertheless, if interest rates decline, it could alter the market dynamics—not only making purchases more affordable for buyers but also leading previous homeowners who locked in lower rates to eventually choose to sell, thus increasing the much-needed inventory.
Similarly, this is not an easy question to answer. Some experts predict that rates could drop to around 5%, but as mentioned earlier, there are also experts who believe they will remain in a higher range. Even if rates do decrease at a certain point, it should not be expected to return to 3%, and any decline may be even slower.
Almost all experts agree that the housing market will not collapse, at least not in the immediate future. The current lending standards are much stricter than before the previous major economic recession, and in a scenario of low inventory and high demand, the real estate market is unlikely to face a downturn unless confronted with black swan events such as a global economic recession or intensified geopolitical conflicts.
Although the answer is not definitive, many predictions foresee a moderate increase in home prices in 2025. The average price growth in 2024 stood at 4.5%, with CoreLogic forecasting a slowdown in home value appreciation to an average of 2% by 2025. However, varying demand and supply dynamics in different regions will result in different price movements. Some cities in Florida, Atlanta, and Salt Lake City may experience more significant price declines, while other markets may stay unchanged.
While the housing market has gradually improved for buyers in 2024, with more instances of sellers making concessions, the market remains tense. Therefore, in most regions in 2025, it is likely to remain a seller’s market.
The good news is that inventory and demand seem to be moving towards a more balanced state. However, in many areas, supply remains severely insufficient, making it challenging to transition into a true buyer’s market. Nonetheless, the actual negotiating space available to buyers will depend on the level of competition for a particular property.