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2025 Housing Forecast

Performance Property Real Estate Question

Q: Gerald, what’s your forecast for the real estate market this year? Alan, Summit, NJ

A: The 3 most important factors that affect local real estate markets are 1) housing supply 2) demand for housing and 3) personal incomes. Nevertheless, both home buyers and home sellers are sensitive to mortgage rate fluctuations. Many people are predicting that mortgage rates will go down this year, while nobody can predict the future, if mortgage rates go down there will be several consequences: the first and obvious being that buying a home will become more affordable (every percentage drop in mortgage interest rates will increase a home buyer’s purchasing power by almost 10%); a drop in mortgage interest rates will also result in more homes for sale (higher housing inventory) because more homeowners who wanted to sell in the past but were afraid of losing their existing low fixed interest rate mortgage loans (a phenomenon called mortgage rate lock) will now sell which means higher home sales overall. Most home sellers are also home buyers and most residential real estate sales are trade-up or trade-down which means that most home sellers after a sale then immediately buy another more expensive (trade up) or less expensive (trade down) home. On the other hand, if mortgage interest rates increase it will likely lead to more mortgage rate lock, less homes for sale (lower housing inventory) and lower number of home sales in 2025.

Regarding rentals for 2025, new multifamily housing supply will be a key factor shaping rental markets this year. Due to ongoing hurdles to homebuying (high home prices and mortgage interest rates) more than half of new households formed this year will be renters which will keep the demand for rentals high and will likely offset the expected increase in rental supply enough that rent prices are unlikely to drop.

There’s no way to know which way interest rates will go but markets are expecting a higher interest rate environment in 2025 with the new Trump administration due to higher tariffs, immigration reduction and deficit-funded tax cuts. More or higher tariffs and stricter immigration policies will push home construction costs higher which will result in lower housing inventory for newly constructed homes and higher home prices for newly constructed homes.

Thanks for your question, Alan.

For more real estate tips and information visit my blog at geraldlucas.com.