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It's looking to be another brutal year for weary homebuyers as 2025 kicks off

  • Homebuyers are still facing an affordability challenge in 2025.
  • Mortgage rates topped 7%, while price growth jumped in the fourth quarter.
  • "The housing market in 2025 faces a difficult balancing act," Fannie Mae's Mark Palim said.

US homebuyers are going to have to gird themselves for another tough year of navigating a tight housing market.

After restrictive mortgage rates and soaring prices put off house hunters in 2024, the affordability picture isn't brightening as 2025 unfolds. Just weeks into the year, borrowing rates have peaked above a psychologically daunting level, while price trends are cause for more gloom.

According to Fannie Mae's Home Price Index, single-family home prices rose 5.8% year-over-year in the fourth quarter, up from 5.4% in the previous quarter. The reading ended a trend of price deceleration that had taken place in previous months.

Difficult supply and demand factors are exacerbating affordability issues, as there continues to be more interested buyers than available homes for sale across much of the US.

"Inventories of existing homes for sale have improved from a year ago but remain historically low, due largely to the so-called 'lock-in effect,'" Mark Palim, Fannie Mae's senior vice president and chief economist, said. The lock-in effect refers to a phenomenon in which homeowners are reluctant to sell their properties given high mortgage rates in the current market.

While lower borrowing costs would help incentivize sales and unlock needed supply of existing homes for sale, the opposite has occurred in recent weeks. Rising mortgage rates are exacerbating the lock-in effect, Palim said.

This week, the 30-year mortgage rate rose to its highest level since May 2024, peaking at 7.09%. The uptick results from dimming views of future rate cuts from the Federal Reserve, with investors coming around to the idea that borrowing costs will likely remain high this year.

The expectation of fewer rate cuts has pressured 10-year Treasury yields to move higher since the Fed began easing monetary policy, with mortgage rates edging up in tandem.

"Bond yields in the U.S. and abroad continued to move higher in response to concerns over a sticky inflation outlook and still too-high budget deficits, which pushed mortgage rates higher for the fifth consecutive week," said Joel Kan, vice president at the Mortgage Bankers Association.

These factors haven't put an end to house hunting in the new year, and Redfin noted a slight pick in home tours at the beginning of 2025. It could signal that buyers are accepting the outlook for elevated rates, or are taking advantage of any new supply that has entered the market.

However, that hasn't translated into more sales, the real estate firm said. During the four weeks ending January 5, pending home sales fell 3.1% from a year ago.

Looking at the year ahead, 2025 will look a bit like 2024, Palim said in mid-December. Mortgage rates are likely to stay above 6%, price growth will ease but remain positive, and supply will remain tight, though this will vary by region.

Homebuyers shouldn't expect a flood of supply of existing homes for sale, given that over 73% of mortgage borrowers are holding on to a rate below 5%. However, Oxford Economics noted that 40% of owners don't have a mortgage, and these households could use the proceeds of a home sale to purchase a new property without taking on high mortgage costs.

Palim suggested that even if the needed supply does come online, that might not immediately bring affordability relief to sidelined buyers.

"The housing market in 2025 faces a difficult balancing act, with a notable decline in mortgage rates likely needed to help unwind the lock-in effect and thaw the supply of existing homes for sale," he said.

"However, we believe such a decline would likely jumpstart demand from potential first-time homebuyers currently waiting to purchase, which could lead demand to outpace any improvement in supply, further exacerbating already-high home prices and purchase affordability."

Read the original article on Business Insider
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