The two big housing market trends to watch in 2025

We have all the data for 2024 in the bag now, and there are two big trends that stand out to me as we launch into 2025. The elephant in the room right now in the housing market is affordability. Home prices finished up, 2024, up another few percent nationally, and mortgage rates are at their highest level in seven months, back over 7% as we head into January. In fact, at 2290, the typical mortgage payment for home buyers is starting 2025 at the highest level ever for the start of the year. So there are a few markets in the south where home prices have inched down recently, and every bit helps buyers, but those prices have not adjusted very much, and there's no sign of any major correction in the works. 2025, housing affordability remains in the US at its worst level in decades. In the last few months, the market has finally seen some sales growth over the previous year, but that growth is in jeopardy if we stay at the high end of the mortgage rate range for very long into Q1. Homes are already staying in the market 20% longer than a year ago. Affordability really hits hard. So the fastest path to changing affordability is a change in interest rates, but there's no guarantee that rates fall. In the housing wire mortgage rates forecast for 2025, we included the possibility of a five handle during the year, rates in the 5% range. What's the scenario where mortgage rates drop over 100 basis points in 2025? Well, if we get lucky on economic news, and if the spreads continue to tighten a bit, that could alleviate some of the affordability challenge vice that everybody is now gripped in. The other trend to watch is whether we finally have more sellers entering the market in 2025. The three years post-pandemic housing market have been marked by very few sellers, 60,000 sellers in a given week versus 80,000 new listings in years past. There are some signals that seller volume is starting to creep back to normal levels. So I'll share those hints in a minute. So let's look at this week's data and see if we can tease out those full signals for the impact on the 2025 housing market. I'm Mike Simonson, I'm the founder of Altos Research. Let's take a look at the data now as we're ready to roll into 2025. So there are now 651,000 single family homes unsold on the market across the US. That's 2.5% fewer than a week prior. It's the holidays, of course. We'll see another week of inventory correction this week with New Year's midweek. Some years, when demand is stronger, the available inventory of homes unsold keeps shrinking until February or even March, but demand is not strong, nationally, of course. So we expect inventory to bounce along under 650,000 in January and then start picking up by February. Inventory is increasing in basically every market around the country. The Sunbelt markets have led inventory growth and the Northern markets been much tighter, but we see that North-South disparity evening out a bit in 2025. So in this chart, you can see 10 years of the inventory trends. We're now three full years of higher mortgage rates and three full years of inventory gains. There's no sign of this post-pandemic era changing in 2025, which means mortgage rates stay elevated in the sixes for most of the year, with inventory rising another 15% or so, getting very close at the end of the year to where 2019 finished. So we're almost back to the old normal levels of unsold homes. That's good news for buyers, as it means improved selection, fewer competitive situations, and less upward pressure on home prices. As we look deeper into the supply side of the market, there were 32,500 new listings unsold this week, single-family homes. That is, of course, very low. It's the holidays. But it is notable that for the last week of the year, there were more new listings this week than in the same week for six or seven years. So it's hard to measure precisely with the holidays, but 32,000 is 33% more homes hit the market in the 52nd week of the year than in 2023. This is probably related to when the holiday hits on the day of the week, but the thing to keep an eye on each week in December is that we had more normal, much more normal levels of new listings each week in December. In the chart here, the gray lines are the previous years. The year normally starts at 20,000 to 30,000 range, single-family new listings. This week, we're at 32,500. That's at the left end of the chart. In the post-pandemic era, the last three years, the most notable trend has been very few sellers each week, new listings each week. That trend has kept a lid on total inventory growth. But it seems to me that there are some early signals that that trend is changing, loosening up with gradually more sellers. Not a lot of sellers, it's not a flood, but 2025 looks less restricted than 2024, and certainly less tight than 23. So each year brings more sellers as the world adjusts to higher mortgage rates. When we look at this chart, these are the unsold new listings. So there's another set of sellers that we call immediate sales. So these are the houses that get listed and then take offers essentially immediately after listing. They don't add to the active inventory, they're already sold. So when we include these new listings that are already in contract this week, there were 21% more sellers than a year ago. So we've been averaging about 8% more sellers each week. There were only 5,000 immediate sales this week, which is the fewest since we started measuring this phenomenon during the pandemic. Again, it's the holidays, there's a lot of noise around the day of the week, that Christmas and New Year's fall. Just keep an eye on the new listings count as we round into Q1 2025. It could be that the shortage of sellers is finally abating a bit. In this chart, at the left-hand edge, you can see we're starting 2025 with 32,500 new listings, single-family homes. It's more than the other gray lines from previous years. We're gonna watch if that red line jumps in January like it did in 2019 and 2020, just before the pandemic. When we look at sales volume, total sales volume, there are 269,000 single-family homes in contract right now. That's 4 1⁄4% more than where we ended 23. It's the end of the year. So there are 8% fewer homes in contract now than the week before Christmas. This New Year's holiday week will also have another week of declining home sales before the January uptick begins. So this is a chart of the total count of single-family homes in contract. Each line is a year. The red lines are 24 and 23, which had very few home sales. And that's just starting to increase. At the left end of the chart, you can see that 2025 is starting above those previous years. So these are contracts pending, the total homes contracts pending. So these are sales that will generally close in January. So there are, of course, 30% fewer homes in that contract process than at the start of 22, when we still had the pandemic frenzy underway. So you can see why we're forecasting 2025 to have maybe 5% sales growth over 24. But it's going to be fascinating to watch this home sales metric over the next month. How sensitive are home buyers to 7% mortgage rates and this latest affordability punch? Do we lose all of the sales momentum that we've seen lately? There was never a lot of sales momentum, but it has been growing. But man, it sure hurts to start the year with mortgage rates over 7%. The newly pending average is down to 44,000. So the recent weeks in that four-week average include both Christmas week and the late Thanksgiving week this year. So still the weekly new pendings average is only 1.3% above last year in December. So keep your eye on the pendings data. I remain optimistic that we'll see some sales growth in 2025. Let's move on to home prices and the affordability challenge. So nationally, home prices are starting 2025 at $395,000, which is 4% higher than a year ago. So if you follow the Altos research data each week, that won't surprise you, but you might be surprised to learn that even when home sales are low, if you don't follow the Altos data, when the inventory of homes around the country is building and when unaffordability is at these crisis levels, you might be surprised that prices haven't fallen. In fact, they're inching up. So in this view here, we have the median price of all the homes in contract. The red line from 2024 across the top shows you how prices cluster right around the big round numbers. So in this case, $400,000 for most of the year. So it turns out that due to a huge number of factors, including seller psychology, legal and tax reasons, it's actually very rare that home prices fall year over year. But this view shows us 2022, when after the pandemic, mortgage rates spiked up higher and faster than anyone anticipated. And the gray line here and the gray zones I've marked in 22, that's when home prices actually fell. Prices recovered in 23, but it looked for a while like home prices would have a down year. So the important lesson from the data here is that while unaffordability is a paramount issue for home buyers, we haven't seen any signal that the price of homes will correct down. There are many people who assume that home prices must fall from here. Unaffordability is just too dire. So here's the thing. If that's going to happen in 2025, you'll see it first in the pending sales data like we saw in the 2022 line. And it's just not in the data yet. So you have to watch this line each week. At the left end of the chart, we're starting 2025 at record levels for January 1. At Housing Wire, we're expecting slightly positive home prices for the year 2025. Starting the year at 4% home price appreciation and ending the year maybe 3.5%. Barely positive, but that's how the market works. So finally, we'll look at the leading indicators for home prices as we start 2025. There are currently 36% of the homes on the market that have taken a price cut from the original list price. That's more than we started, 24, which indicates slightly weaker supply demand balance than a year ago. There are 27% more homes on the market and only 4% more sales. So you can see why slightly more sellers are taking a price reduction than they were a year ago. So still, this number is not tremendously high. It'll keep falling this spring with fresh inventory and new buyers for the next few months. But if mortgage rates stay over 7%, that'll keep a lid on buyer demand and some of those sellers won't get the offers they were hoping for. Buyers are perfectly happy to wait while sellers have to act. So in this chart, you can see at the left end where 2025 is starting, we expect weekly declines in the proportion of sellers with price reductions, but the steepness of that curve and when it starts to turn up will tell us a lot about the year's home buyer demand. In the first quarter of 23, when home prices were actually below a year earlier, and I just showed that home prices fell in the second half of 22, but price reductions at that same time, that beginning of 23, that's the light red line here, they were growing fewer. So that told us at the time that while the headlines were really negative, home prices are down, but we could already see a floor on those prices for 23 and the year ended up with home prices again. So these price reductions are a leading indicator for future sales prices. The number is elevated now with 7% mortgage rates to start 2025. So we're gonna see how much home buyers care about this affordability here. So stay tuned. Okay, that's all the data we have for today. Happy New Year's, everyone. If you need to communicate about this housing market to buyers and sellers, you should join us at Altos Research. Go to altosresearch.com. You can book a free consult with our team. You can sign up for a free Altos account. So we'll help you dive into your local market and help you start helping people understand the market today. Link below. Happy New Year.