2025 housing market: Is it the right time to purchase property?
The Federal Reserve decided to keep interest rates steady at its meeting on January 29, marking a shift in the lower-rates cycle as inflation has cooled and the Fed assesses the economic landscape. While lower interest rates have been a focus recently, mortgage rates have remained relatively unaffected by this downward trend.
“While we still see signs of resilience in the labor market, the higher mortgage rates that are associated with a growing economy will likely continue the affordability challenges faced by many potential homebuyers,” said Mark Palim, chief economist at Fannie Mae.
This sentiment raises a valid concern for prospective homebuyers in 2025—when evaluating the housing market, including mortgage rates, rising home prices, and the low availability of homes for sale, is now a good time to buy?
Understanding the 2025 Housing Market
Mortgage Rates
One of the primary factors influencing the housing market is mortgage rates, which have remained near 7%. Over the past year, rates for a 30-year mortgage dropped to 6.08% in late September but have struggled to fall any further. According to Freddie Mac, the highest rate during this period was 7.22%.
Experts predict that mortgage rates in 2025 will stay relatively high. The National Association of Realtors expects them to "moderate," stabilizing around 6% through 2026. On the other hand, Zillow and the Mortgage Bankers Association foresee rates hovering around 6.5%, while Redfin anticipates rates to be near 7% by the end of 2025.
Despite the predicted moderation, rates are still below the 52-year historical average. Since 1971, the 30-year mortgage rate has averaged 7.72%. For perspective, the highest rate on record was 18.63% in October 1981.
Home Inventory
The U.S. faces a significant housing shortage. Estimates from the National Association of Home Builders suggest a deficit of 1.5 million homes, while Freddie Mac puts the shortfall at 3.7 million. Zillow's data suggests a gap of 4.5 million homes. Whatever the precise figure, it's evident that inventory is critically low, and it could take years to return to more normal levels.
“It took us about a decade to get into this housing deficit, and it's probably going to take us about a decade to get out,” said Rob Dietz, chief economist for the NAHB.
Freddie Mac reports that 5.8 million homes have been added to the market in the last four years, but demand has risen just as quickly.
Action Tip: Consider expanding your search to more affordable areas nearby if your preferred neighborhood feels out of reach.
New Home Construction
Homebuilder confidence is improving, particularly after the recent election. Carl Harris, chairman of the National Association of Home Builders, noted, “With the elections now in the rearview mirror, builders are expressing increasing confidence that Republicans gaining all the levers of power in Washington will result in significant regulatory relief for the industry that will lead to the construction of more homes and apartments.”
Action Tip: If you're aiming to buy now, consider looking at new construction homes. You may have the chance to choose some finishes or get a better deal on a spec home that's been on the market for a while.
Home Prices
Home prices remained stable throughout much of 2024, with a 3.3% appreciation, according to CoreLogic. However, Dr. Selma Hepp, CoreLogic’s chief economist, said, "Looking ahead, early housing market indicators suggest that [the] 2025 spring home buying season may look very similar to 2024 — more inventory but also challenging affordability, suggesting that home price appreciation will continue to slow, averaging about 2.4% for the year."
With the housing market facing these ongoing challenges, experts expect that around 4 million existing homes will be sold in 2025, similar to 2024.
Action Tip: Look for homes with price reductions in the area you’re targeting. Apps like Realtor.com and Trulia can send alerts for price changes, helping you negotiate better deals.
Is It a Good Time to Buy a House?
To determine whether it's the right time for you to buy a home, you need to look beyond general market conditions. Home buying is a personal decision that depends on your unique financial situation and long-term plans.
Where Do You Want to Be in 5 Years? When you rent, your decision to move is usually based on short-term leases, typically lasting a year or two. However, buying a home requires considering long-term commitments like a mortgage, property taxes, and potential relocation expenses.
Your Income A crucial consideration is the stability of your job and income. Will you need to move for work in the near future, or can you stay in the same location? Is your income predictable and secure?
Your Credit Score Your credit score plays a significant role in qualifying for a home loan. Generally, a conventional mortgage requires a FICO score of 620 or higher. FHA loans can go as low as 580 with a 3.5% down payment. Veterans may qualify for VA loans, which typically don’t require a minimum credit score, though some lenders may ask for 620.
Higher credit scores lead to better loan terms, including a lower annual percentage rate, which can result in considerable savings over the loan’s life.
Your Debt Load Lenders also assess your debt-to-income (DTI) ratio to gauge your ability to repay a mortgage. Fannie Mae generally looks for a total DTI ratio of 36%, although some exceptions can allow up to 50%.
Your Savings In addition to a cash cushion for emergencies, it’s important to have enough saved for a down payment. For a conventional loan, you'll generally need at least 3% down, though 20% is ideal to avoid private mortgage insurance. The median down payment in the third quarter of 2024 was 14.5%, roughly $30,300.
Your Next Move
Once you’ve evaluated your financial situation, the next step is to start shopping smart. Compare interest rates from various lenders and get a written pre-approval letter before you begin house hunting. It’s also essential to be diligent and negotiate hard for a home you can comfortably afford.
FAQs: Is It a Good Time to Buy a House?
Should I Buy Now or Wait for a Recession? While recessions often lead to lower mortgage rates, they also tend to increase buyer competition, which may drive home prices up. It's best not to try to time the market but to buy when it fits your personal situation.
Should I Buy Before Rates Drop? Some might suggest buying now and refinancing later if rates decrease, but it’s crucial to make sure you’re comfortable with the current terms. Don’t buy a home just on the hope of future rate drops.
Should I Lock in a Mortgage Rate? Locking in a rate is generally a short-term decision. If you’re comfortable with the terms on your Loan Estimate, then it’s time to start packing your boxes and prepare for the next step.
Will Housing Ever Be Affordable Again? As your income and savings grow, homeownership becomes more affordable. What seems challenging initially can become manageable as you pay down your mortgage and your property appreciates.
In conclusion, while there are multiple factors to consider, the decision to buy a home should be based on your financial readiness, long-term stability, and personal needs.
