Challenging housing conditions have left the market stagnant for several years. Rising mortgage rates and housing prices have reduced affordability, dampening buyer demand and home sales in the process.
Though initial 2025 housing market forecasts looked promising, buyers may only see minor improvements.
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The lack of substantial mortgage rate reductions through the end of the year continues to create affordability challenges for first-time home buyers. While this may drag down sales, overall conditions are improving.
How home prices and mortgage rates change will determine whether buyers return to the market or if many will choose to continue renting in hopes that the market will eventually turn around.
A family is shown looking at their new home. Buyers may still face challenging mortgage rates this year, potentially driving down housing sales.
Shutterstock.
Zillow predicts home sales will be lower than anticipated in 2025
When the Fed began slashing interest rates in September, mortgage rates inched closely toward 6%, and most forecasts predicted 2025 would see a flourishing housing market.
However, as political and economic uncertainty increased toward the end of 2024, mortgage rates began climbing toward 7%, dashing any hopes of a strong housing market revival.
Zillow recently revised its 2025 Home Value and Home Sales forecast to account for weaker performance than anticipated.
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Home prices were initially expected to increase 3% this year but are now expected to only grow 0.9%. Home sales are projected to surpass 4 million this year, which is in line with 2023 and 2024 numbers.
While there may not be as strong of a housing revival as previously expected, underlying conditions are improving. Mortgage rates are down 1.5% from their recent peak in 2023, and buyers are slowly coming back to the market as competition is eased from increasing inventory.
However, it may take more to convert potential buyers into homeowners.
Potential buyers may stick to the rental market for now
Housing sales will likely remain below pre-pandemic levels in the year ahead, even as the peak spring homebuying season approaches. As housing sales remain sluggish, more potential buyers are opting to continue renting — the more cost-effective option as the average 30-year mortgage payment rises.
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Homeowners who were locked into a 3% mortgage rate a few years ago pay roughly $1,000 less per month than those with a 7% mortgage rate now.
This affordability gap is prompting potential buyers to remain renters. Zillow estimates that single-family and multi-family rent prices will both increase more than 3% this year as rental demand increases.
Though the 2025 housing market performance isn’t set in stone, meager mortgage rate declines will likely still keep buyers wary of homeownership, even as the situation improves.
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