Looking Ahead: Can 2025 Turn the Tide After Real Estate’s Worst Year Since 1995?
As we step into 2025 with hope and predictions for the year ahead, we leave behind a sobering milestone: 2024 marked the worst year in real estate since 1995. Several factors converged to create a perfect storm for the housing market, leaving buyers, sellers, and industry professionals grappling with its challenges.
Here’s a look at the key metrics that defined this challenging year:
• Existing Home Sales: Resales declined 3.5% compared to the same period last year (also a sluggish year), hitting their lowest rate since the worst months of the housing bust. (Wolf Street)
• Inventory Levels: Housing inventory reached a four-year high this fall, with a 12.1% year-over-year increase. Homes lingered on the market longer as high prices deterred potential buyers. (New York Post)
• Home Prices: Despite the slowdown in sales, home prices continued to rise. The National Home Price Index reported a 3.6% annual increase this fall, underscoring the persistent affordability challenges. (Barron’s)
• Mortgage Rates: Elevated mortgage rates were the most significant obstacle, with the 30-year fixed mortgage rate hovering around 6.6%, making financing increasingly unaffordable for many buyers. (Fox Business)
These factors combined to create a sluggish housing market. High prices and borrowing costs sidelined potential buyers, pushing inventory levels higher. The market’s stagnation has been compared to the housing bust, emphasizing the severity of 2024’s downturn.
What We Got Right and Wrong About 2024
Reflecting on the year, here’s a breakdown of where housing market predictions hit the mark—and where they missed:
What We Got Right
• Economic Strength: The U.S. economy outperformed expectations, with third-quarter growth hitting 3.1%—almost double initial forecasts. This resilience provided a strong foundation for broader market stability.
• Inflation Progress: Inflation rates continued to decline, dropping from a 9.1% peak in June 2022 to 2.7% by the fall of 2024. While progress was notable, achieving the Federal Reserve’s 2% target remains a work in progress, with core inflation exceeding initial projections.
What We Got Wrong
• Fed’s Rate Cuts: Despite early-year signals of three potential rate cuts, the Federal Reserve did not lower rates until late 2024, as inflation proved more persistent than expected.
• Lower Mortgage Rates: Predictions of lower mortgage rates did not materialize. Instead, U.S. mortgage rates ended the year near 7%, remaining largely unchanged and contributing significantly to the market’s struggles.
What’s Ahead for 2025?
Housing analysts are cautiously optimistic about 2025. They predict a 9% increase in home sales and stabilizing mortgage rates around 6%, which could ease affordability pressures for buyers.
However, concerns linger about external factors that could shape the housing market:
• Trade Wars: Ongoing or escalating trade disputes could drive up the cost of housing materials like lumber, steel, and appliances, as the U.S. imports a significant share of these goods.
• Immigration Policies: Stricter immigration policies may worsen labor shortages in the construction industry, where over 30% of workers are foreign-born. Combined with higher material costs, these labor shortages could push housing prices even higher.
• Inflationary Pressures: Trade-related inflation could prompt the Fed to raise interest rates again, further increasing borrowing costs and creating headwinds for potential buyers.
A Strong Economy Meets a Sluggish Housing Market
We close 2024 with a strong economy but a slow housing market—a rare combination that presents both challenges and opportunities for the year ahead. Will stabilizing rates and increased sales give housing the boost it needs in 2025? Or will broader economic and geopolitical factors hold it back?
As we watch the market unfold, one thing remains clear: the housing market is as resilient as it is unpredictable. I expect a similar market in 2025 to what we saw in 2024—but hey, 2025, prove me wrong!
