If mortgage rates hover around 6.5 percent, albeit with some volatility, we should see slower home-price growth and a little breathing room develop for stressed buyers. iStock illustration
As we steamroll into the new year, it’s wise to reflect on recent market trends, upcoming challenges and potential growth opportunities. The housing industry has proven its ability to adapt to changing circumstances over time, and 2025 should be no different.
After several years of ballooning values, 2024 brought some much-needed relief to rising home values and 2025 is expected to offer more of the same. Home values are predicted to grow at a modest rate of about 2.6 percent nationally, a much slower pace when compared to previous years. Per CoreLogic, year-over-year home price index growth was 4.9 percent from 2010-20, 14.8 percent in 2021, 14.5 percent in 2022 and 3.9 percent in 2023.
This should provide some breathing room for financially stressed buyers. This forecast assumes that interest rates will hover around 6.5 percent, and that more sidelined sellers will ultimately list their homes, in turn making homeownership attainable for a wider range of people.
Rate Could Ease, Inventory to Improve
Given the instability of mortgage pricing over the past two years, it’s impossible to predict where rates will land in 2025. The consensus, however, is that mortgage rates will remain volatile but may ease slightly by the end of the year.
According to Freddie Mac, the average 30-year fixed-rate mortgage has fluctuated between 6.08 percent and 7.44 percent over the past year. Volatile rates create both challenges and opportunities. Lower mortgage rates can entice prospective home buyers who are still struggling with a lack of inventory and/or financial resources. On the other hand, if rates rise unexpectedly, it could damper buyer activity and potentially lead to slower home sales.
Inventory is expected to grow in 2025, giving buyers more options. The National Association of Realtors predicts a notable increase in home sales in the coming year (existing home sales up 9 percent year-over-year, new home sales up 11 percent). However, economists predict the job market’s improvement and the stock market’s recent growth could result in an increase in homebuyers, so that inventory could move quickly!
After years of living large, we seem to be trending toward a “less is more” mindset, represented by a single word: cozy. What had become a euphemism for small or cramped is now a sought-after design trait, evidenced by the fact that listings that mention “cozy” jumped by 35 percent in 2024, according to a recent Zillow analysis.
This movement is driven primarily by cost: Smaller homes tend to sell for less, are usually cheaper to insure, and are less expensive to heat and cool.
Affordability Still a Problem
Housing affordability remains a major hurdle for many Americans, particularly for those in the low-to-moderate income demographic as well as for first-time homebuyers.
The combination of rising home prices and elevated mortgage rates continues to make it difficult for some people to purchase a home. Not to be lost in this conversation are the effects of rising insurance premiums, real estate taxes and Private Mortgage Insurance.
Stabilizing mortgage rates and an uptick in available listings could help with affordability, provided incomes keep pace. According to NAR, the job market is expected to add close to 2 million new jobs in 2025. This job growth could translate into a stronger housing market. It’s also worth noting that changes in local, state and federal regulations regarding housing construction and development could influence the availability and affordability of homes.
According to the Mortgage Guaranty Insurance Corporation, the top four borrower challenges in the past year were interest rates, lack of inventory, mortgage payment affordability and lack of viable down payments. Low-to-moderate income and first-time homebuyers may have limited banking and/or credit history, so homebuyer education, savings support, and credit coaching or counseling are an important part of the homebuying process.
What Lenders Need to Know
Lenders should take the time to assess and augment their loan offerings to ensure all qualified borrowers have borrowing options available to them. Aligning with government or municipal agencies could translate into loan programs with expanded credit eligibility, subsidized interest rates, lower down payment requirements and maybe even the ability to waive private mortgage insurance.
Finally, lenders should make every effort to source down payment assistance funds for qualified borrowers to leverage their purchasing power and help obtain affordable homeownership. These funds exist on most every level from local affordable housing trusts all the way up to government-sponsored enterprises and can often be layered to maximize the benefit to the consumer.
While achieving affordability presents numerous challenges, the current market also presents some opportunities. The underlying demand for housing is expected to remain strong in the coming years, fueled by demographic trends and continued job growth.
Historically, real estate has been a solid investment for many. As the new year unfolds, homebuyers and lenders will need to navigate the marketplace together to ensure it remains that way.
Jay Bianchi is an assistant vice president at North Adams-based MountainOne Bank.
