After a decade of stability in the housing market, skyrocketing inflation during 2022 prompted consistent interest rate hikes from the Fed. The average 30-year fixed mortgage rate jumped from 3.2% in January 2022 to over 7% by December 2022.
Home buyers in 2023 saw rates consistently above 7%, dwindling housing inventory, higher home prices, and increased competition.
While the housing market saw modest improvements in 2024, mortgage rates are expected to remain above 6% through 2026.
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Berkshire Hathaway Home Services predicts a few key changes for the 2025 housing market, and it expects political and economic variables to ultimately shape its overall performance.
The 10-year treasury yield and the federal funds rate play a role in deterring mortgage rates, and both are dependent on inflation, economic stability, and geopolitical factors.
The incoming presidential administration has vowed to shake up Washington, and the economic outcomes of policy changes will likely determine how the housing market changes over the next few years.
A family is shown looking at their new home. Homebuyers will likely face housing market headwinds through 2025, with sustained mortgage rates and rising home prices. However, the housing supply is expected to increase, easing competition.
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Homebuyers will see continued affordability and supply issues in 2025
Consumers have identified affordability as the biggest obstacle preventing them from testing the housing market, but limited housing supply, heightened mortgage rates, and rising home prices don’t appear to be going anywhere anytime soon.
78% of U.S. adults who don’t own a home cite affordability reasons as the top barrier to homeownership, and 28% note that they can’t afford a down payment for a home.
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The Berkshire Hathaway HomeServices (BHHS) blog notes that mortgage rates and limited housing supply have “created an imbalance in the marketplace, choking homebuyers into pent-up demand and freezing homeowners with low mortgage rates into inaction.”
Though progress is being made on the housing supply, home prices are still rising and outpacing inflation. Realtor.com expects the existing home supply to increase by 11.7% this year from 2024 levels.
The blog also highlights that “the impasse between rates and affordability will continue, causing home price growth to slow down, but price declines aren’t expected in the near future. Home prices will continue rising in 2025 at a pace of 3.7%.”
Housing supply may increase, but political uncertainty looms large
Increasing available housing inventory has been touted as a way to undo the housing market gridlock caused by high mortgage rates.
Homebuilders anticipate constructing 1.1 million new homes this year, signaling an almost 14% increase from 2024. However, the industry is taking a different approach and building smaller, more affordable homes to appeal to first-time home buyers.
This approach mirrors that of the 1980s housing market crisis, when mortgage rates hit a record high of 18% in 1981, and didn’t fall below 10% until 1986.
Related: Billionaire Bill Ackman makes a bold bet on housing market
The Trump administration’s border economic policies are expected to impact the U.S. economy and consumer prices. Uncertainty around the exact policies that will be enacted and how they will impact the economy is fueling housing market hesitancy.
Though Trump has proposed reducing construction regulations and freeing up federal lands for housing construction, his tariff and immigration policies could negatively affect the economy — and housing market.
The BHHS blog underscores this point: “These policies may influence construction costs and the availability of labor, potentially impacting home prices and availability.”
“Markets are also anticipating the possibility of higher economic growth and tax reforms under the new administration. If these goals are achieved, it could lead to increased incomes and a potential shift in housing affordability.”
“However, the exact impact on the housing market will depend on the execution of these policies.”
Related: Veteran fund manager issues dire S&P 500 warning for 2025
