The Housing Market Is SHIFTING In A HUGE Way

The housing market is about to shift as we head into 2025. Everything's going to change from inventory to affordability to mortgage rates. And that's exactly what we're going to dive into as we head into our 2025 housing market forecast. Jeb, if our audience is anything like me, they are tired of shifts. I don't need any more shifts. I need some stability. I need some predictability. We're going on two and a half years of pivots, twists, turns, ups, downs. It's going to go this way. Oops, just kidding. It's going to go that way. Let's look, just to sort of set the stage here for trying to project what 2025 may look like, just the last 90 days. We had a September Fed meeting. The Fed comes out, cuts 50 basis points. Mortgage rates had dropped significantly, almost a full percent ahead of that cut. And the Fed came out and said, hey, we're going to have in the next two years another 200 basis points cuts. We're going low. We got inflation under control. We're worried about the employment market softening, and we no longer need to be restrictive. We're going to take that away. So despite the two meetings since then, another 25 and another 25 basis point cut. So 100 basis points of cuts in total and interest rates for the mortgage side are back where they were before the Fed started cutting. The Fed was sort of back to where they were. Hey, inflation is on track, but not progressing as quickly as we want. The employment market is strong. We're not as worried as we were 90 days ago. Now, that is the smartest group of economists in the country, or one of them, the smartest collection. Let's say that with the access to the best data in the last 90 days, they flip-flopped 180 degrees. I listened this morning, Jeb, to one of our favorite analysts give his breakdown of it. And he said, I'm hearing something different than what most other people are saying. Yes, they shifted. They went and did a 180, but the bar is really low for another shift, again, back in the other direction. So just prepare to be bipolar. And Jeb and I today are going to give you as much information as we have, as we know, and what it looks like most likely the base case scenario is for 2025, especially the first half of it, which is more predictable than the second half of the year. Well, there's really a couple of things that people do in forecast, Josh. There's a little bit of talking points, if you will. One thing is they talk about prices. One thing, they typically talk about interest rates. They talk about sales volume, which most people don't typically care about. They don't care how many homes have sold, but I think that's going to be something important to talk about here. But they also talk about inventory, right? So all of those things kind of make up a forecast. But let's drill down to the basics here real quick, Josh, and talk about what's been driving the market over the last couple of years. Yes, interest rates have pulled a lot of demand forward. It's been a key driver in affordability, but really the basis, the foundation of everything has been supply and demand. Everything comes back to the fact that we've had more buyer demand than we've had actual supply of homes in most markets across the United States. Now, it wasn't just a Southern California thing where we're the only market that went gangbusters. We saw it in Texas. We saw it in Idaho. We saw it in Tennessee and Florida and all of these states. And since then, we've seen a little bit of a pullback. Over the last six months or so, we've seen inventory grow in some of those states. At the time we're recording this, there's 10 states back to 2019 inventory levels, and there's four right on the cusp. So just give the four to the 2019. Let's just say you can have those four. That means there's 36 states that still have less supply than prior to the pandemic. And if we're going back then, Josh, which hindsight is often very, very clear when talking about this stuff. But 2019 wasn't a year where we were like, we have so much inventory. It was still a time when inventory was somewhat low for the most part. So we're going, but that's our measuring stick. 2019. And why that matters, Jeb, is that that's the measuring stick. Are we in a seller's market or a buyer's market? Meaning you as a buyer, do you have the power to go in and negotiate a better price? Negotiate some concessions to negotiate a buy down. So in 2019, it was a more balanced market, but still slightly tilted in favor of sellers. Sellers were getting good prices. We're not having to give a huge amount of concessions. And 36 out of the 50 states are back to 2019 versus the crazy seller's market where buyers had no leverage for the better part of two and a half years. No, exactly. And so when we take these forecasts, I think what we're going to do, Josh, is just kind of give an overarching view of what the consensus of the market is. What are the analysts expecting? What are the economists expecting for 2025? And then we'll kind of give our take in, you know, whether or not you and I being in the industry, having a lot of conversations with different people, whether or not it kind of vibes with that or if it's different from that. So kind of starting from the basics here, Josh, let's talk about, you know, just go over home prices. Expected to go up somewhere between two and four percent in 2025, along with mortgage rates averaging somewhere between six and a quarter and 6.8 percent by the end of 2025. We got sales volume, essentially the same up to almost 4.4 million. So an increase of about 10 percent, just under 10 percent if we're looking at where we're going to end 2025 or 2024 rather. And then inventory, probably the biggest piece of this. And I think probably the most important outside of rates is the fact that inventory is expected to increase about 13 percent in 2025. So I think let's start with the most important piece. Right. So there's the kind of the just the throwing up of the numbers out there. Let's talk about what some of this stuff means. And I want to start with the most important thing here. And that's rates because rates are really the driver of the market. They impact your buying power. We've talked a million times here on the show that people care less about the price of the home than they do about the payment over time. We can see the best chart is not the chart of home prices where they go. It's the chart of household incomes to buy the median priced home. So affordability has been strained. We've talked about this a billion times. The reason why we focus on interest rates the most is because interest rates are of the three levers, home prices, wages and interest rates that affect affordability. They're the one that can move the fastest. And we've seen we haven't seen a sustained move towards lower interest rates over the last two and a half years in early 2022. We started right at 3% the beginning of 2022. So just three years ago, that's a crazy statement. Three years ago, we were at 3% and that first half of 2022, just a straight wall climb up to the six, six and a half percent range and a peak around 8%. Since that time, it's been very volatile, Jeb. We've seen runs back down under 6% for very brief periods and then runs all the way back up over 8%. So it's going to tell us a little bit about strategy and not being married to the rate that you're getting as long as you can afford it. So we want to make sure we don't want to fall into this trap of marry the house, date the rate. But if life is telling you, this is now is the right time to buy and you can afford to buy. We're not using temporary buy-downs, permanent buy-downs like the builders are doing. We're not using that as a tool to be able to get in over our heads. We're using it to say, hey, I want to leverage this volatility ahead and know that I'm probably going to have a window where I can get a better interest rate if I'm buying in one of those windows with the higher interest rate. But the projection for the year, as you said, 6.25% to 6.8% is where most of those forecasts come into play. Logan over at HousingWire has given a range of 5.75% on the best end to about 7.25% on the high end. And as we sit today, Jeb, here at the end of 2024, we're going to end probably just a hair over 7% unless we see a nice correction here. So we're towards the high end of that range. So I think it's a reasonable expectation that you would see a run to that mid-sixes with dips down into the low sixes next year, possibly into the high fives. It's going to be a volatile move towards lower rates with spikes and dips where you're going to have to determine how to play that as a homebuyer. Yeah, I actually pulled up a chart yesterday, Josh, for another video I was doing. And we've basically the average for 2024 was 6.77% so far right through two weeks left in December here. And looking at that chart, man, it is just zigzag, just up, down, up, down. And it was up, down, up, down all the way to the top and then same thing to the bottom. And then it's been like that the whole time, which for the consumer, they think, well, I'll just plan it right. I'll just do it when it's at the low. Unfortunately, most people don't get the opportunity to do that. I mean, we saw rates at the lowest levels we've seen all year. I think it was September and a lot of people sitting on the sidelines, not wanting to pull the trigger with the idea that they were moving lower. Well, guess what? They moved up. And so a lot of those people got just, you know, didn't even have the opportunity to take advantage, missed out on refinances, so on and so forth. So it's one of those things that as rate, you know, you can't control rates. You can only control where you are in the process. So, you know, it's what if you're considering locking a rate, lock it, right? Don't play the market. And this isn't part of the forecast. This is just us having a friendly conversation here from one professional to another. Josh and I just saying, hey, listen, just, you know, don't don't try to time the market. But Josh, let's talk real numbers. Where are we at today at 7% on on a payment? What does that look like? If rates go down, what is it? What is the what is the real impact that we're talking about here? So we're going to look at a $500,000 purchase with these numbers, Jeb. For some parts of the country, that's going to be high. For some parts of the country, it's going to be terribly low. But it's pretty, pretty indicative of what most people are looking at. If you're looking at 7%, that's $3,237 a month. If that drops to six and a quarter by the end of next year, so the high end of the low part of that range for next year, it goes as low as $3,079. So you're talking there a solid $250 difference in your monthly payment. Over the course of the year, that's $3,000. It's almost one less payment per year. So when you say, well, what's the big difference from seven to six and a quarter? Well, it's a lot. It's real money. It's going to save you the equivalent of a payment over the course of a year. So a lot of people hear that and go, well, I'm just going to wait until we hit that level. Well, we got numbers today, Jeb, that November existing home sales, the biggest improvement year over year that we've seen in a couple of years here. It wasn't a gangbuster report by any stretch, but the important part to note is that's the tail end of those low rates from September. Because some people got in and got them locked. Some people just said, I'm going to apply now, and they got out. They missed that window, but they got a property under contract in October. They finally closed it in November. So we have seen that volumes will spike. Buyers will come out when rates dip. So you don't have the ability to predict when it's going to happen, and you don't have the ability to generally act quickly enough to get fully pre-approved, get out, find a house, get it under contract before we lose these windows. And there's no guarantee going forward that the next two years are going to be like the last two years. But these windows have been like 45 days or less where you can take advantage of these rates, three quarters to a half percent or to a full percent lower than what we've seen over the course of the year. You said 677 average for the year. We have several people we did refinances for in the high fives in September and October. So those windows have been very short. So the hubris of thinking I can predict the market and I know that rates are going to go lower. Don't fall prey to that. If we get one of these nice runs where you get a half percent, three quarter percent improvement and you either own and you're looking to refinance or you're looking to step into the market. Like Jeb said, we have a very volatile market. If you have seen a nice improvement and you're comfortable with that payment and you're in escrow, take that stress of that out of the equation and get it locked in. So my belief, Jeb, and I think you agree, is that we will see improvement throughout next year and we will end probably under six and a half next year. So more than a half percent better than where we are today. But what I will say is I don't expect it ever to be a straight line. It's going to be volatile. There's going to be continued head fakes. We'll get a couple of data points that convince the market that things are going this way. And then we're going to need a couple more data points that things are going to go the other way. The thing is, you can get lulled to sleep after a couple of years like this where we haven't had any major inflection points. Since that turning point in early 2022, where rates shot up and sales volume decreased because less people were willing and able to buy at the higher interest rates, it's been a very similar market. So people start going, well, this is the way it's going to be going forward. The economy is still going to be solid. Inflation is going to remain slightly above where people want it to be. It's going to be this way going forward. We're literally going on 16, 17 years since we've had a recession. It's going to happen at some point. Markets can remain irrational longer than we can remain solvent. If you had been betting on a recession for the last 2, 3, 4, 5 years, you would have been wrong and you would have gone broke. But it's going to come at some point, and that will be an inflection point, and it will lead to significantly lower rates. The question is, are you and your household suffering when that recession comes and even able to take advantage of it? So from that perspective, there's going to be a change or an inflection. But I think when we look forward, there's still enough uncertainty, enough residual strength in the economy that's causing inflation, that's keeping employment really good, that's keeping wage gains above trend that I think we're likely to see an improvement, but not a monster improvement. We're not going to get 5%. We're not going to get 4.5% in the next year unless you did have a hard break to a recession. So with that, guys, what do you think about a recession? Are we going to see one in 2025? Do us a favor, let us know in the comments below. Now, Josh, I think the biggest driver of 2025 is going to be inventory, outside of rates. Rates control what happens, but I think 2025, think, right? This is my opinion. The idea is that consensus is expecting inventory to increase. I agree with that consensus, with the idea that more inventory is going to come into the market in most of the United States. There are still pockets in the Northeast that are suffering anemic levels of supply, just really, really low. But here's what I say. I'm having more conversations personally with sellers who have owned their homes, who have low fixed interest rates, that were, quote, unquote, locked into their properties because of where the payments were, because of where they bought the homes price-wise, and looking at the market saying, I'm going to have a higher rate and a higher payment. This sucks. I don't know that I'm going to do that. These people are now willing to sacrifice now. They're willing to give up those rates because they want a change in scenery. They don't like the area that they're in. The property no longer fits their need. There's a lot of that going on in conversation. And I think also that the, you said the lull to sleep earlier with just the market kind of moving sideways. I think that is playing an impact in the psyche of the seller who's a buyer thinking, well, I don't know that we're going to see much lower rates from here, so I just better do this because I see home prices continuing to go up. The home is getting further out of reach. And if I can refinance in the future, I'll just take advantage of that. And so, Josh, I think we're going to see that. And I said I think a lot in that little couple minutes there. But it is my belief that inventory is going to increase this year. Not back to 2019 levels across the United States, but instead of being this bifurcation of markets like we've seen this year, where some have increased while others have just been really, really low in two different markets. I think as a whole, the U.S. is going to see more inventory. Let me give a slightly different angle on that and take it back to interest rates. The biggest reason why we have seen inventory levels increase over the last 12 months is not that more homes are coming to market. It's that less are getting bought. There are more. We've seen an increase of homes coming to the market. But in general, it's that those homes are taking a little bit longer to sell. So inventory is accumulating in the market. And that's largely a function of demand. And demand will be dictated going forward by interest rates. So the longer we stay up here above 6.5%, the more it says that you're 100% right, the inventory will build, gives buyers more power, gives buyers the ability to bargain, to get buy-downs, to get closing costs covered. But the closer we get to that 6% level, as we saw from today's existing home sales for November, there's going to be more buyers out there if that happens. So when you're looking at it, everyone wants lower interest rates as a potential buyer, especially a first-time buyer. But also beware that that's going to bring more demand and more competition. Nothing like 2020, 2021. But the benefits that we're talking about of more inventory are going to be greater the higher interest rates are throughout the next year. And remember, sellers are buyers, right? The majority of people putting their homes on the market are also taking one off. So just because more inventory comes to the market doesn't necessarily mean it's going to automatically shift in this crazy buyer's market where you have all the power. But I do think it is going to shift towards more of a buyer's market than it's been in the last three to four years. Homes sitting on the market longer, the pricing disparity, the belief of where prices should be from a seller's perspective versus reality is real. And those homes sit versus the homes that adjust to where the market is right now typically sell quicker. And so the buyer and the agent are going to have a lot to do with how quickly homes sell. If they can come to an agreement on price and it correctly from the start versus taking a listing that's too high and it sits on the market a little bit longer. So that allows inventory to grow. But remember, as more sellers are willing to put their homes on the market, they're also taking them off. So your competition is there. And so with that, Josh, how does that play into home prices? The consensus, as we said, is somewhere between 2.4 to 4%. If we see lower rates as a whole and we see more inventory coming to the market, that in my head says, well, prices have to go up. But do they? So we've seen low volume with above trend. When we say trend, the trend for the last 30, 40 years, appreciation for the last two years. Obviously, massive appreciation through COVID. But post-COVID, the market has been surprised. You and I have been surprised at the strength in year-over-year home price appreciation. I can say I have not seen a dip in volume of buyers over the last six months relative to the six or 12 months before that. I have seen sort of a dip in their willingness to push. More of them saying, this is my number. We have a buyer out in Arizona, listener to the show, that he's like, no, these are overpriced. I will look for two, four, six, eight months. I am comfortable where I'm at. I don't have to buy a home. I got a bunch of money sitting in the bank. I will buy when I get the right number that I get. So we're seeing more of that. There's definitely a pushback. There's a pushback just in terms of affordability. We've seen ICE does their monthly mortgage market report that the income ratios are higher than they have been. So there's not an ability to continue pushing prices higher, as we've seen in the past, absent rates coming down below what they've been the last two years. So if rates come down, you would see a little bit higher appreciation. But I still think there's just been a moderation on the part of buyers. Hey, I've hit the wall. This is where I'm at. I am not going higher than that. So most of the forecasts that we're looking at, Jeb, you gave that range of 2.4% to 4.4%. If you throw out the outliers, Apollo Global Management has a crazy number of 11%. We're not going to see 11% appreciation next year. Moody's on the low side at minus 0.4%. Almost everyone here, from the Mortgage Bankers Association at 1.5% to the American Enterprise Institute at 5%, they're somewhere in that 1.5% to 5%. I think we're probably likely to be at about 2% to 3%. And your mileage may vary. So remember, this is all regional. So if you're in southwest Florida, it's going to be very different than if you're in Connecticut. So you need to know your local market and what this looks like. But nationally, I think we're going to see some of that below-trend growth that we've talked about. So what do we mean by that? Historically, nationwide, you see about 4.5%, 4.7% year-over-year. We should be below that this year. Does that mean that you're stoked that the $500,000 house only goes to $510,000 this year? No. It's still more expensive than last year. Another concept, Jeb, that we talk about on the show is the idea of real appreciation. If homes only go up 2% this year and inflation stays at 2.5%, homes got more affordable on a real level by 0.5%. You don't feel that. You're not going to be stoked by it. But we're likely to see another year of gains below the rate of inflation. So hopefully, inflation continues to come down. Hopefully, home price appreciation continues to come down. My expectation would be definitely sub-5%, probably in the 2.5% to 4% range would be my call. Yeah, and everybody thinks as realtors and people in the business that we want to see this crazy appreciation year-over-year. And the reality is, no, that's not healthy for the market. We actually do more transactions when affordability is better. So if you're looking from that standpoint, we like it when everybody can afford a home versus the few that can. So, Josh, we talk about the willing and the able, right? So, you know, kind of off-topic here. We didn't mention it in today's episode when talking about buyer demand, but there's always people willing to own homes, right? We know that from just history, right? Sixty-five or so percent of people, of Americans, are homeowners at any given point in time. And there's just some people out there that will never be able to own a home for one reason or another. But the majority of people want to be able to own a home. And so the problem at the moment is the able, the people that are willing and able to do it because of where rates are, because of where affordability is. And so as things improve, wages continue to go up, which they do go up, people. You might not feel it so much just because prices are higher than they have been. But wages increase, interest rates coming down, prices stabilize. That creates a better overall market for people buying homes. Even though it might not feel like it at the time, it is an improvement in the overall dynamic. So I think that's what 2025 is going to be, Josh, is a little bit different, right? We went through 2021. It's crazy to think it's five years since the pandemic, almost five years. But we went through three crazy years of a market. The last two years have been a little bit more normal outside of the number of transactions. Transactions have been low. So with that, Josh, let's finalize, or I guess in the episode here talking about sales, most people don't care about this, but why do sales impact the overall market? What kind of an impact did they have? Well, the more sales you have, the less likely you are to have that inventory build. So to me, it goes back to interest rates and affordability. The lower rates go, the more affordable homes are on a relative basis, the more transactions we'll have this year and the less inventory. So all of these things are kind of interrelated. Most forecasts we're looking at are saying 4.1 to 4.4 million. If you go back and look at our forecast last year, I think, Jeb, you were a little below that 4.4, and I think I was about 4.6. So expecting lower interest rates last year and a greater recovery in the amount of transactions being done. I do expect we'll do more transactions next year for some of the reasons that you talked about. The people who have been able but unwilling the last couple of years saying, I'm waiting for prices to come down. Oh, this can't stay this way. Well, again, the longer you stay in an apartment with a wife and a kid, and now two kids, and it's been four years since the pandemic, and everyone's looking at you like, dude, what are you doing? Time's passing us by. More people will buy regardless. But I think we've kind of seen that 4 million, 4.1 million is a floor, and until you get a major increase to affordability, I think 4.5 is probably your cap. So probably the middle of that range is where I would fall, 4.25, 4.3, which is better than this year, but not appreciably better. Yeah, I'm in agreeance. I think you're going to have 4.3, 4.4. You could see 4.4 maybe, depending on how much what inventory does. But I also believe existing home sales are going to play a bigger role in 2025 than new home sales just because of where builders are in the process. Some of these homes are going to finish construction. There's not a lot of new starts out there on the horizon. That's been way down. Right, so that is going to have less of an impact in the new home sales piece, which means those people that can't buy new homes because they're not there in their markets are going to have to go to existing if they're looking to buy. So that could help out those numbers. But overall, Josh, I think I can speak for myself and say that I think 2025 is going to be a better overall market than 2024. But with that, what should someone do right now if they're thinking about buying a home in March or June or even September of next year? The most important thing is building your team and doing your prep. And people sometimes don't think this. Think a realtor, if I'm not going to buy until spring or summer, they don't want to talk to me now. If I'm not going to get a loan until spring or summer, no one wants to talk to me right now. One of the most valuable things as we head into the new year, as we head into tax season, and people wanting and hoping and preparing to buy next year is to do all of that legwork. So if you sit down with your team, so we're talking about nationwide numbers. If you're in Oklahoma City, you don't care what we're talking about on a national level. You want to get with a realtor who is a local market expert who can give you the data, the seasonality, the expectations, what their local association of realtors, the data they're putting out, and do all that research and lay it out for you. At the same time, you're getting numbers from a lender that says, okay, here's where the prices are. For $325,000, you can get what you want. It may be $340,000 by the end of the year. Here's what that difference looks like. Show you what a payment looks like at six and a quarter versus 7%. Because a lot of times, Jeb, what I get, and I'm sure you get the same thing, the differences that sound really big in your head when you look at them on paper are not nearly as big. We arrived at the numbers. They were right. Their thinking was right. But when we looked at a couple things, they were a little more open to maybe, if they needed to go $10,000, $15,000, $20,000 above where they were thinking, the amount of difference in the monthly payment. They're like, no, we could absolutely do that if we needed to. Still wanted to stick at their price point. But that, to me, is the most important thing that you can be doing now versus waiting and then going, okay, now we're ready, but you've got to get ready. That mental point in your head when you are 100% ready to go out and start writing offers, you're a little late to the game and you're dealing with incomplete information. So build a team, get a game plan, whether that game plan is to buy in February or it's to buy in October. At least you know what your thoughts and plans are. And as next year unfolds, despite all the expected volatility that we're talking about, you can adjust from that game plan. If you never start a game plan, you're just like a leaf getting blown around in the wind. Good stuff. So if we can be a part of that, we would love to be a part of that. You can actually reach out to Josh and I and our team here on the mortgage and the real estate side using that referral link in the body of the description. But, you know, we'd love to know your thoughts on what you happen to think, what you happen to think, what you think is going to happen in 2025. But you can do that by actually leaving us a comment below. But until next time, guys, make sure you're buying right, you're borrowing smart, which will ultimately lead to building wealth. Adios. Amigos.