Will home prices drop in 2025? Here’s what to expect

The housing market is always buzzing with speculation, and 2025 is shaping up to be no different. So, will home prices drop in 2025? Whether you’re a potential buyer, seller, or just someone keeping an eye on the real estate market, understanding the factors that influence house prices can make all the difference. Let’s take a look at what experts are saying and what it means for you.

What’s driving the 2025 housing market?

The 2025 housing market is shaped by a combination of economic, demographic, and policy factors. Together, these elements influence supply, demand, affordability, and market behavior. Let’s break down these key drivers, below.

Federal Reserve policy

The Federal Reserve’s monetary policy plays a critical role in the housing market, primarily through its influence on interest rates. After significant rate hikes aimed at curbing inflation in previous years, the Fed is expected to adopt a more cautious approach in 2025. While drastic rate cuts are unlikely, gradual easing could occur if inflation stabilizes at manageable levels.

This subtle reduction in rates may lead to lower mortgage costs, which would ease affordability challenges for buyers. However, rates are not expected to return to the historically low levels of 2020–2021. This means mortgage rates will still remain higher than during the housing boom of that period. Of course, even a small dip in rates can have a large impact on buyer behavior, encouraging more activity in the housing market.

Economic conditions

A strong economy supports the housing market by boosting consumer confidence and maintaining steady demand for homes. In 2025, key indicators such as low unemployment rates and wage growth are expected to sustain demand. With jobs more secure and incomes relatively stable, more individuals and families will feel confident enough to purchase homes despite higher borrowing costs.

However, broader economic factors such as regional job growth or slowdowns could create disparities. Areas with thriving industries or tech expansions might see increased housing demand, while regions experiencing layoffs or economic stagnation could face declining demand and prices.

Demographic shifts

Demographics are another significant factor driving housing demand. Millennials, now in their 30s and 40s, are reaching their peak homebuying years. This group forms the largest segment of buyers, seeking homes to accommodate growing families or lifestyle changes. Gen Z, entering their mid-to-late 20s, is also starting to make its mark as first-time homebuyers.

Together, these two generations represent a large and sustained wave of demand. They are particularly interested in affordable housing options, suburban properties, and homes in areas with good schools and community amenities. Their needs and preferences are reshaping the types of homes being built and the areas seeing the highest demand.

Read more: Multi generational home

Construction trends

While new home construction has been on the rise, it’s still catching up to the significant underbuilding that occurred after the 2008 financial crisis. Builders have increased output in response to high demand, but challenges like rising construction costs, labor shortages, and zoning restrictions have slowed progress.

In 2025, we’re likely to see continued growth in new construction, especially in suburban and exurban areas where land is more available. Affordable housing developments and multi-family units, such as townhomes and apartments, may also gain traction to meet the needs of younger buyers and renters. However, the pace of construction may not be sufficient to fully address the inventory shortfall. This may keep the housing supply tight in many markets.

Where are interest rates heading?

Interest rates are the lifeblood of the housing markets, affecting everything from monthly mortgage payments to housing affordability. As of late 2024, the average 30-year mortgage rate sits at a steep 6.7%. While this is far from the historic lows of 3% seen during the pandemic boom, the good news is that experts predict a slight decline in 2025.

Fannie Mae, the Mortgage Bankers Association, and others suggest rates might dip into the upper 5% range. While this may not sound like a dramatic drop, it could bring much-needed relief for buyers. For example, a lower interest rate could mean saving hundreds of dollars per month on an average home loan. It’s a modest win, but every bit helps when budgets are tight​.

Housing inventory: What’s on the market?

Housing inventory – or the lack thereof – has been a thorn in the side of buyers for years. The pandemic exacerbated this problem as builders struggled with labor shortages, supply chain issues, and skyrocketing materials costs. The result? Too few homes for too many buyers.

The good news is that inventory levels are expected to improve slightly in 2025. According to Realtor.com, active listings in 2024 increased by over 35% compared to 2023, with more homes priced in the $200,000 to $350,000 range. This trend may continue into 2025 as sellers regain confidence and new construction ramps up​.

By the end of September 2024, there was a 4.3-month supply of homes available, up from the tighter 2.9-month supply earlier in the year. While this is still short of the 5-6 months considered a balanced market, the increase in inventory offers hope for buyers who have struggled with limited options. Additionally, lower rates could make it easier for builders to access capital, potentially leading to more construction activity and further alleviating inventory shortages.

However, don’t expect inventory to reach pre-pandemic levels. Many homeowners in the U.S. are still hesitant to sell because they’re “locked in” to ultra-low mortgage rates from previous years. Unless rates fall significantly, many of these homeowners will stay put, limiting existing home sales.

What’s the role of local real estate markets?

While national trends provide a helpful overview, your local market holds the real answers. Factors like job growth, new housing developments, and population shifts can have a huge impact on house prices.

For example:

• Fast-growing metros such as Raleigh, NC, and Boise, ID, might continue to see price increases due to strong demand and limited supply.
• Cooling markets such as San Francisco and Seattle, which were once red-hot, could experience further corrections as affordability concerns weigh heavily on buyers​

Will home prices drop, stay flat, or rise?

Here’s the big question on everyone’s mind: will home prices drop in 2025 or go up further? The answer is complicated because it largely depends on where you live.

Nationally, experts are split. Zillow predicts a slight dip in prices, estimating a 1.4% decrease year over year. This might sound small, but it’s significant when compared to the double-digit increases seen during the pandemic frenzy. On the flip side, organizations such as CoreLogic and Goldman Sachs predict moderate price increases ranging from 1.8% to over 4%​.

Why the disparity? Real estate markets are highly local. Take Austin, Texas, for instance. The city saw massive price increases in recent years but is now cooling off, with price declines expected as the market recalibrates. Meanwhile, steady markets like Chicago or Indianapolis may continue their slow, upward trajectory. It’s all about supply, demand, and local economic factors.

Will there be a balancing act between buyers and sellers?

If you’re planning to buy or sell in 2025, understanding the current dynamics between buyers and sellers is crucial. Here’s the lay of the land:

• For buyers: Affordability remains a major challenge. Even with slightly lower interest rates, high prices and stagnant wages mean that many potential buyers are priced out of the market. The silver lining? Increased inventory might reduce bidding wars, giving buyers a bit more leverage.
• For sellers: The market is still tilted in your favor, but the golden era of sky-high offers might be behind us. In many areas, you’ll need to price competitively and work with an experienced real estate agent to attract buyers. Sellers in traditionally high-demand areas may still see multiple offers, but these will likely be more measured compared to the frenzy of 2021-2022.​

So, will 2025 favor buyers or sellers?

Although the housing market showed signs of improvement for buyers throughout 2024, conditions are still expected to favor sellers in many areas in 2025. Limited inventory remains a significant factor, with supply levels in most regions still below what’s needed for a balanced market.

The good news for buyers is that the gap between supply and demand is narrowing, and some markets with a surge in available homes for sale may start to shift in their favor. In these areas, buyers could benefit from price adjustments or have more negotiating power. However, for the majority of the country, the tight housing supply will likely keep the scales tilted toward sellers.

So, should you buy or sell in 2025? Here’s a quick breakdown:

• Buyers: If you’ve been waiting for the perfect time, 2025 might be it — especially if mortgage rates dip as expected. Focus on affordability, and don’t stretch your budget just to compete in a high-demand market.
• Sellers: If you’ve been holding off, 2025 could be a good time to list. Work closely with a local agent who understands your market and can help you set a realistic asking price.

What’s ahead for the housing market in 2025?

The housing market in 2025 is expected to be influenced by several key factors, including mortgage rates, housing inventory, and broader economic conditions. While the average 30-year mortgage rate saw some improvement, it’s not the sharp decline that many prospective home buyers had hoped for. Still, there’s optimism that rates will continue to decrease, albeit gradually, over the next year.

As mortgage rates ease, they’re likely to unlock some of the demand that has been building up among buyers sidelined by affordability concerns. This doesn’t mean a return to the rock-bottom rates of recent years, but even slightly lower rates could make a significant difference for those looking to enter the market or upgrade their homes.

Adding to the uncertainty, the political landscape could also play a role in shaping the housing market. A new presidential administration might bring changes to housing policy, with a focus on addressing supply-side issues to tackle the ongoing housing crisis. This could mean measures aimed at boosting construction, easing regulatory barriers, or increasing affordability initiatives.

The bottom line

While challenges remain, there’s plenty of good news for both buyers and sellers in 2025. For buyers, increasing inventory and lower mortgage rates could make the market more accessible. For sellers, the persistent demand ensures homes will continue to sell, especially in desirable locations.

The 2025 housing market is a mixed bag of opportunities and hurdles. Whether you’re buying your first home, selling a property, or just watching the market, staying informed and flexible will be your biggest assets.

Written by Ramona Sinha. December 4, 2024

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.