The Frozen Housing Market: Challenges Persist into 2025

As 2025 begins, the housing market remains largely frozen, with few signs of improvement in the near future. The high mortgage rates, limited inventory, and persistent affordability challenges that have weighed heavily on the housing sector over the last two years show no sign of disappearing. While there were some hopeful signs late in 2024, the broader picture still points to a sluggish market as buyers and sellers grapple with difficult conditions.

Signs of a Slower Recovery

Late last year, there were brief signals of improvement in the housing market. Pending home sales rose for four consecutive months through November, boosting hopes that the two-year slump in residential real estate was finally starting to thaw. Industry experts have pointed to the fact that buyers are becoming more willing to accept the high mortgage rates, adjusting their expectations and deciding not to wait for lower rates before purchasing a home.

Lawrence Yun, Chief Economist of the National Association of Realtors, explained, “Mortgage rates have averaged above 6% for the past 24 months. Buyers are no longer waiting for or expecting mortgage rates to fall substantially.” In some areas, such as the South, where homes are more available and job opportunities are plentiful, pending home sales rose 5.2% in November, signaling that some parts of the market are still seeing demand.

However, this limited recovery has not been enough to overcome the broader challenges that continue to define the housing market.

High Mortgage Rates and Declining Affordability

Despite a brief dip in mortgage rates late in the summer of 2024, they quickly climbed back up to decades-high levels. Rates remained above 6% throughout 2024 and crept toward the 7% mark by the end of the year. As a result, mortgage applications fell by nearly 22% in December. While December is typically the slowest month for home-buying activity, the overall trend of high mortgage rates has dampened hopes that the market will see any sharp declines in borrowing costs anytime soon.

Robert Reffkin, CEO of real estate company Compass, shared his perspective on the outlook for mortgage rates, saying, “We are no longer having a view that mortgage rates are going to go to the fives next year or even the following. We believe they will stay around the 6% range for the next two years.”

The prolonged high rates are a significant factor contributing to one of the worst home affordability crises in decades. According to the Federal Reserve Bank of Atlanta, affordability for the average-income family is at its lowest since 2006. Many buyers have been forced to stretch their budgets in order to afford a home, and a recent analysis by NBC News found that about 1 in 4 middle-income new homeowners are now financially burdened by their mortgage costs—double the proportion of just ten years ago.

As CoreLogic observed, “This persistent increase in prices and interest rates has created a challenging environment for both first-time buyers and those looking to move up the property ladder.”

Inventory Shortages and the Lock-in Effect

The inventory shortage remains a persistent challenge, exacerbated by a phenomenon known as the “lock-in effect.” Many homeowners who secured ultra-low mortgage rates in recent years are now hesitant to sell, as they would face much higher rates if they were to purchase a new home. This has led to fewer homes being listed for sale, intensifying the supply shortage and further complicating the market for buyers.

CoreLogic pointed out that “existing homeowners who previously secured ultra-low mortgage rates are likely feeling locked in now, which intensifies the inventory shortage by further limiting the supply of homes on the market.”

This situation creates a particularly tough environment for first-time buyers, who are already struggling with affordability, and for those looking to move up the property ladder.

Economic Uncertainty Adds Pressure

Broader economic uncertainty continues to weigh heavily on the housing market. One key factor is the inflationary risk posed by President-elect Donald Trump’s proposed economic agenda, including tariffs, tax cuts, and restricted immigration. These policies could potentially raise consumer prices and further complicate the housing market.

In particular, many homebuilders have expressed concerns about the potential impact of Trump's mass deportation plans, which could disrupt the construction industry by cutting off access to a labor force that is heavily reliant on immigrants. This could slow down construction and drive up housing prices.

However, there is still hope that new policies will not disrupt the market to the extent some fear, as the housing sector adjusts to these economic challenges.

A Glimmer of Hope in New Construction

While the broader housing market remains stagnant, there is a glimmer of hope in certain regions of the country where new homes are being built. Areas like Florida and Texas are seeing new construction projects aimed at addressing the demand for housing in these fast-growing regions. This influx of newly built homes could help balance the supply and demand equation in these markets, offering some relief to homebuyers.

CoreLogic noted, “Newly built homes are coming onto the market in some in-demand parts of the country, including Florida and Texas — offering a glimmer of hope for a better-balanced market in 2025.”

Looking Ahead: Adjusted Expectations for 2025

As we move into 2025, it’s clear that the housing market will require patience and flexibility from both buyers and sellers. The ongoing high mortgage rates, combined with limited inventory and the lock-in effect, are likely to keep the market in a relatively frozen state for the foreseeable future.

For buyers, managing expectations will be key. As Reffkin pointed out, mortgage rates are expected to remain around 6% for the next two years, which means many will need to adjust their budget to accommodate these higher rates. Sellers, meanwhile, will need to remain flexible with pricing and be patient as the market continues to work through its challenges.

In conclusion, while there are some signs of improvement in certain markets, the broader housing market in 2025 is likely to remain stuck in a challenging environment. Buyers and sellers will need to adjust their strategies and expectations in order to navigate this uncertain landscape.