The real estate market should pick up next year, but the road ahead looks bumpy

Those who braved the housing market in 2024 faced one of the weakest sales years in three decades. Next year should be a little better.

Many of the issues that have sidelined would-be buyers and sellers this year, such as mortgage rates at 6% to 7% and home prices near record highs, show no sign of abating. However, real estate experts expect there will be more homes on the market next year as buyers and sellers come to terms with today’s world of higher interest rates.

The real estate market has been virtually stuck since mortgage rates began their rapid rise in 2022. Homeowners who had been lucky enough to secure interest rates around 3% in previous years suddenly found themselves reluctant to move if it meant taking out a new mortgage at an interest rate that doubled over 3%.

But that “lock-in effect” may finally begin to ease in earnest next year, as the life events that always prompt people to move — births, deaths, marriages, divorces and job changes — continue, while mortgage rates fall and improved inventory levels provide further stimulus Price competition.

Read more: Mortgage rates are falling – is this a good time to buy a home?

Real estate agent Scott Pratt, who works in Buford, Georgia, north of Atlanta, said business has been slow for most of the year, but he expects more inventory to come to his market this spring. He expects buyers may find better deals as the year progresses and sellers who have been on the sidelines will adjust their prices to reflect the current market.

“It’s going to be another year of pain, but at the end of the year some of these people who said they’re going to be locked up forever and want to leave are going to move,” he said.

Complicating the recovery is the fact that home ownership remains unaffordable in large parts of the country.

Average home prices today are about 30% higher than before the pandemic, outpacing income gains achieved over the same period. Higher mortgage rates, rising insurance costs and higher property taxes present additional challenges for potential buyers.

Due to ongoing affordability issues, the increase in transactions is still expected to be well below historical averages.

“We expect there will continue to be a slow increase,” said Danielle Hale, chief economist at Realtor.com, which expects existing home sales to rise 1.5% to 4.07 million next year. This number would be well below the average of 5.28 million homes sold per year between 2013 and 2019.

Surveys suggest consumers would need mortgage rates of 5.5% before they disappear en masse from the sidelines. Few real estate experts expect interest rates to be this low next year, especially given uncertainty over President-elect Donald Trump’s economic policies. But mortgage rates in the 6% to 6.2% range have been enough to fuel a surge in buying and selling this year, and those levels remain possible next year.

Read more: Why are real estate prices so high?

Zillow sees a bumpy road ahead for mortgage rates in 2025, starting with a decline, then a rise, then another decline. Such volatility is typical in most years, and next year will add more unknowns arising from the presidential transition and the Federal Reserve’s ongoing rate-cutting cycle, said Orphe Divounguy, senior economist at Housing Markets.

Zillow economists ultimately expect interest rates to be below current levels of about 6.7% by the end of 2025, but note that “there is no guarantee.”

Realtor.com sees potential for interest rates to average 6.3% next year. Brokerage firm Redfin, on the other hand, also expects fluctuations next year, but believes the average could remain around 6.8%, close to current levels.

Los Angeles-based real estate agent Walter Franco Jr. said even slightly lower interest rates next year probably wouldn’t be enough to cause a stir in his expensive market. Buyers looking for $1.5 million to $2 million homes aren’t very sensitive to price changes, but those looking for cheaper options are, he said.

“At this more entry-level price point, the prices are really oppressive,” Franco said.

Read more: When will mortgage rates go down? A look at 2024 and 2025.

Nationally, many economists are calling for home prices to rise between 2% and 4% next year, about in line with the historical average. However, the strength of the housing market is likely to vary greatly depending on location. The most expensive markets along the coast are expected to see larger price increases due to a lack of new construction and the abundance of wealthier buyers who have benefited from stock market gains in recent years.

On the other hand, cities in Florida and some parts of the Southeast and Midwest may not see such strong increases. The Florida condo market remains in crisis as owners struggle to meet the high repair bills resulting from the 2021 Surfside condo collapse. And property prices are expected to stagnate or fall in some less affluent areas as lower earners struggle to afford homes.

“We are positioned so that those who are advantaged will continue to be advantaged in this housing market, and those who have less access will continue to have less,” said Lisa Sturtevant, chief economist at Bright MLS.

Sturtevant expects home price increases to be greatest in already high-cost metropolitan areas such as Boston, New York and Washington, DC. Cities that saw the most aggressive price increases during the pandemic, followed by falling prices last year – such as Tampa, Florida. and San Antonio, Texas – could see smaller increases or even price declines.

Meanwhile, unknowns surrounding the Trump administration’s economic policies threaten a fragile recovery. Some measures he has proposed, such as tax cuts and tariffs, would likely exacerbate inflation and cause interest rates on products, including mortgages, to stay higher for longer. But builders are excited by his commitment to deregulation, which could make it easier for them to build and help lower prices by expanding housing supply.

Waldorf, Maryland-based real estate agent Jon Benya, who works with many government employees, contractors and military personnel, said Trump’s talk of cutting the size of the federal government or moving certain agencies out of Washington could be enough to calm activity in southern Maryland .

“Perception is reality, and if you are unable to work because you fear your job might be eliminated, finding a new home is the last thing on your list,” Benya said.

Claire Boston is a senior reporter for Yahoo Finance covering housing, mortgages and home insurance.

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