How the US Housing Market Could Recover After a Tough Year

America’s housing market faced challenges in 2024, including high prices, sluggish sales, and elevated mortgage rates, which remain above 6%. Despite three interest rate cuts by the Federal Reserve, borrowing costs have not eased. However, the market could find relief through two key factors: continued job growth and increased housing inventory. Economists suggest that a strong labor market, with low unemployment and steady paychecks, will sustain demand for homes. At the same time, more homeowners may choose to sell, driven by life changes, easing the “lock-in effect” of low mortgage rates and providing buyers with more options.

Housing inventory grew by 17.7% this year, and further gains could come from both resales and new construction, especially in regions with robust development activity like the South and West. However, the pace of homebuilding may be slowed by high construction loan rates, as the Fed shows no urgency to lower borrowing costs. While job growth supports demand, it could also increase home prices, as seen with a 1.5% price rise for every 1% employment gain. Balancing inventory growth with affordability will be critical to stabilizing the housing market in 2025 and beyond.

Mortgage Industry Responds to Fed’s Third Rate Cut

The Federal Reserve’s third interest rate cut of 2024, reducing rates by 0.25%, has had little impact on mortgage rates, which remain near 7%. Mortgage professionals note that the cut was already factored into bond yields, limiting its effect on borrowing costs. While home equity loan rates will drop slightly, consumer price inflation remains a challenge, keeping mortgage rates elevated. Economists predict mortgage rates will average around 6.5% in the coming years, with significant volatility tied to inflation and fiscal policies.

Experts highlight that job growth and increased housing inventory will be crucial for stabilizing the market. Multifamily apartment completions from prior housing starts may help reduce rent pressures and improve affordability over time. Although mortgage rates are high compared to recent years, they are still below the 50-year average of 7.7%. This suggests that consumers are gradually adjusting to the current market conditions, with steady employment and housing supply being key drivers for home sales.

2025 Housing Market Outlook

The 2025 housing market is expected to bring more new homes but will still face challenges with high prices and limited affordability. Mortgage rates are predicted to remain elevated, staying in the 6% to 7% range, making it difficult for first-time buyers to enter the market. Lower rates may worsen affordability by increasing competition and driving up prices. However, more new single-family homes are expected, driven by builder profits and the persistent housing shortage. The “lock-in” effect, where homeowners stay put to keep low mortgage rates, is expected to ease slightly, leading to increased inventory.

The luxury housing market is likely to remain strong, as high borrowing costs less impact wealthy buyers. Meanwhile, renters may face rising rents due to higher demand and limited new apartment construction. Legal uncertainty also looms over the real estate industry, with potential DOJ intervention regarding practices like commission agreements. Despite these challenges, experts predict steady growth in housing activity, especially in new builds and the high-end market.