U.S. Housing Market Faces Challenging Year Amid High Prices and Mortgage Rates
The U.S. housing market experienced a significant downturn in 2024, with existing home sales plummeting to their lowest level in nearly three decades. According to the National Association of Realtors (NAR), sales of previously owned homes totalled 4.06 million last year, marking the weakest performance since 1995 and slightly underperforming 2023’s lacklustre figures. Sky-high home prices and elevated mortgage rates continued to create hurdles for prospective buyers.
Elevated Mortgage Rates Add to Buyer Struggles
The average rate on a conventional 30-year fixed mortgage peaked at 7.22% in 2024, a level not seen in years. Although rates briefly dipped to nearly 6%, they climbed back to 7.04% before settling at 6.96% by year’s end, as reported by Freddie Mac. These elevated borrowing costs have significantly impacted affordability, forcing many would-be buyers to postpone their homeownership dreams.
Record-High Home Prices Persist
Adding to the affordability crisis, the median price of existing homes has climbed consistently for 18 consecutive months, reaching a record-breaking $407,500 in 2024. In December, the median price stood at $404,400, highlighting the persistent upward trajectory of home prices. Despite these challenges, December 2024 saw a 2.2% increase in existing home sales compared to the previous month, reaching an annualized rate of 4.24 million—the fastest pace since February 2024.
NAR Chief Economist Lawrence Yun noted, “Home sales in the final months of the year showed solid recovery despite elevated mortgage rates. Consumers clearly understand the long-term benefits of homeownership. Job and wage gains, along with increased inventory, are positively impacting the market.”
Housing Market Outlook for 2025
The outlook for buyers in 2025 remains grim. Mortgage rates are projected to stay above 6% through 2026, a stark contrast to the 1980s when high rates were offset by significantly lower home prices. In addition, soaring home insurance premiums and persistent affordability challenges continue to weigh heavily on the market.
One of the most pressing issues is the ongoing housing supply shortage. Despite a 16.2% year-over-year increase in total housing inventory by December 2024, the market still faces a deficit of 3.7 million homes, according to a recent Freddie Mac estimate. Inventory fell 13.5% in December compared to November, signalling ongoing volatility in supply levels.
The Lock-In Effect and Its Impact
A notable factor contributing to the housing supply crunch is the “lock-in effect.” Homeowners who secured low mortgage rates before the Federal Reserve’s interest rate hikes in 2022 are reluctant to sell, as moving would require taking on loans with much higher rates. However, some homeowners did sell in 2024 due to life events such as marriage, divorce, or the arrival of children, helping to marginally boost inventory.
Builders Look to Deregulation for Relief
High borrowing costs also dampened homebuilding activity in 2024. Nonetheless, there is cautious optimism among builders that deregulation could alleviate some supply pressures. Scott Turner, nominated to lead the U.S. Department of Housing and Urban Development, has pledged to review and reduce regulations to encourage homebuilding. While the Federal Reserve is expected to cut interest rates only a few times in 2025, deregulation may provide some relief to the strained market.
However, deregulation alone may not fully counteract other challenges. Proposed tariffs and immigration policies could increase the cost of construction, further complicating efforts to address the housing shortage.
Closing Thoughts
As the U.S. housing market faces another challenging year, affordability remains a significant barrier for many buyers. High mortgage rates, soaring home prices, and limited inventory continue to strain the market. While deregulation and incremental improvements in supply offer glimmers of hope, substantial relief may remain elusive in the near term. For prospective buyers and industry stakeholders, navigating these headwinds will require careful planning and adaptability.
Disclaimer: This information is for general knowledge and informational purposes only and does not constitute financial, investment, or other professional advice.