Can one anticipate achieving home ownership by the year 2025?
Can one anticipate achieving home ownership by the year 2025?
As we head into 2025, Skylar Olsen, the chief economist at Zillow, commented with a sense of déjà vu, predicting that the housing challenges of the following year will resemble those of the preceding year.
In 2024, home buyers were older and wealthier than ever before, given the increasing difficulty in buying homes due to a lack of affordable options. The median existing-home sales price reached an all-time high of $406,100 in November, marking the 17th consecutive month of price increases, according to the National Association of Realtors (NAR). Prior to the Covid-19 pandemic in November 2019, the median sales price was $274,000, as per NAR's records. This substantial increase in home prices enhanced the financial status of homeowners.
Rent prices also witnessed a rise, posing challenges for renters looking to save up for a down payment. Nearly half of all renters paid more than 30% of their income towards housing costs, as reported by the US Census Bureau. This resulted in a record-high homelessness rate in 2024, with the Department of Housing and Urban Development attributing this trend to insufficient affordable housing options.
Homeowners too faced various financial setbacks in 2024. Those residing in disaster-prone areas witnessed a significant surge in home insurance premiums, while escalating repair costs due to inflation added to their financial woes.
Mortgage rates play a crucial role in determining housing affordability. Initially, economists projected that mortgage rates would fall below 6% before the end of the year. However, the Federal Reserve hinted at limiting interest rate cuts to only twice in 2025, which resulted in mortgage rates climbing to 6.85% last week, up from 6.61% in the same period the previous year. According to Freddie Mac's data, Zillow expects mortgage rates to remain above the 6% threshold throughout 2025, culminating at around 6.2%.
This anticipated situation presents a mix of opportunities and challenges for potential home buyers in 2025:
Homeowners remain rooted in place
The U.S. real estate market is on track to experience its worst sales year in nearly three decades, as reported by NAR. This downturn can be partly attributed to homeowners having little motivation to relocate due to secured low-interest mortgage rates during the pandemic.
According to a report published by the Consumer Financial Protection Bureau, nearly 60% of the 50.8 million active mortgages carried interest rates below 4%. The financial advantage of maintaining a 4% mortgage rate over a 6% one could result in significant annual savings for the average homebuyer.
Despite the prevailing mortgage rates, Chen Zhao, an economist at Redfin, anticipates a gradual reduction in rate pressure in 2025.
"I think it's mostly still going to be a trend in 2025," she said. "But as time goes on, people's reasons for moving accumulate and they get unlocked by necessity."
Major life events, such as starting a family or securing a job in a new city, may necessitate home sellers and relocations, even if it means surrendering a sub-4% mortgage rate.
Prices will escalate, albeit not uniformly
In 2024, existing-home sale prices exhibited a record-breaking streak, according to NAR data. This boosted the wealth of homeowners, adding $5 trillion to their collective household equity since the pandemic.
This long-term lack of construction coupled with the increasing number of millennials reaching the typical homeownership age has led to a significant disparity between supply and demand. These trends are expected to persist in 2025, leading to further increases in home prices.
However, home price growth may decelerate, according to Olsen.
"More homes have been lingering on the market lately, and those homes will likely require price adjustments," she said. "The market has shifted to favor buyers this year compared to the last two or three home-shopping seasons, when demand was exceptionally high."
Location remains a crucial factor, with homebuyers in Southern states expecting steeper price cuts than in other markets.
New regulatory rules affecting buyers
A new set of rules governing the operations of NAR members in the U.S. officially came into force in August. Analysts predicted that these regulations would eliminate the traditional 5% to 6% commission earned by the seller. While NAR maintains that commissions are always negotiable, critics argue that they had been factored into listing prices, thereby inflating them artificially.
Since the implementation of these rules, home prices have continued to climb. The impact of these regulations on home buyers in 2025 remains unclear, as next year marks the first spring buying season under these rules.
"So far, there hasn't been much evidence suggesting that commission rates have reduced," Zhao said.
Any potential commission adjustments are likely to occur in the luxury home market, where Realtors are entitled to substantial commissions based on a percentage of a property's sale price.
The federal government's role
The U.S. government can potentially introduce legislation to alleviate the financial burden associated with housing costs, as both Democratic and Republican candidates discussed during the 2024 campaign.
Financial policy analyst Jaret Seiberg of TD Cowen has advocated for Republican policymakers to increase the availability of affordable housing through tax incentives during President-elect Donald Trump's administration.
"Housing might become a significant political focus in the upcoming two years, according to Seiberg's statement to clients recently. Our perspective is that the Republican party needs to tackle the rising inflation in affordable housing to secure future victories. This is why initiatives like tax incentives to boost construction are on the table."
On the other hand, Zhao cautions that Trump's proposed threats of significant customs duties against prominent global trade allies, such as China, Canada, Mexico, and the European Union, could negatively impact the housing market.
"If he indeed executes broad-based tariffs, it would imply that mortgage rates will likely remain high for a primary reason. This is due to the anticipated pressure caused by inflation," she explained.
In light of the anticipated mortgage rates remaining high throughout 2025, the business of buying and selling homes may pose challenges for potential buyers. The increasing mortgage rates could potentially deter some individuals from entering the housing market.
The ongoing challenges in the housing market, as predicted by Skylar Olsen, could impact the broader economy by affecting consumer spending and investment patterns, as home ownership and the housing market play a significant role in the overall health of the economy.