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Affordability might improve a little bit next year for homebuyers, especially as mortgage rates ease and incomes rise, but don't expect buying a home to get significantly easier in 2025.
Fannie Mae recently published its top five predictions for the 2025 housing market, and the main takeaway is that next year might bring more of the same trends we saw this year, including low affordability and low inventory.
"I think a lot of the trends that affected home buyers in 2024 are going to continue into 2025," says Mark Palim, senior vice president and chief economist at Fannie Mae.
However, there is potentially some good news, especially if you're in an area with more inventory or homebuilding activity.
Mortgage rates are forecast to go down next year, but they probably won't drop enough to substantially improve affordability.
Fannie Mae researchers think 30-year mortgage rates will remain above 6% throughout 2025, ticking down to 6.2% by the end of the year.
However, mortgage rates will likely continue to be sensitive to economic data and shifts in the outlook.
"As more data is reported, and news around potential policy changes develops, we expect bouts of financial market volatility as bond markets reprice interest rate expectations," the forecast notes.
More than half of Fannie Mae single-family mortgages have a rate below 4%, disincentivizing these homeowners from selling and keeping that supply off the market. This is called the lock-in effect.
Because of this phenomenon and the general lack of affordability, existing home sales are only expected to improve slightly in 2025 and will remain low relative to their pre-pandemic levels.
However, some areas of the country will fare better than others. Fannie Mae researchers, citing Realtor.com data, say that many states in the Sun Belt, Mountain West, and Pacific Northwest regions have inventory levels near or higher than their pre-pandemic levels.
Inventory should also continue to improve in these areas thanks to more construction and sales of new homes.
"The South and Mountain West are places where land and zoning allow for more construction and thus make up the bulk of [new home] sales," the researchers said.
Another piece of potentially good news in Fannie Mae's forecast: Home prices are expected to grow at a slower pace than incomes in 2025.
Fannie Mae estimates that home prices will have grown 5.8% by the end of this year. But next year, growth may slow to 3.6%.
"That would be helpful for affordability given that incomes are growing around 4%," Palim says.
If this happens, it would be the first time wage growth outpaced home prices in over a decade.
"We've seen the rent versus buy, how much it costs to rent versus buy, move substantially in nearly all metros to being it's cheaper to rent for the moment," Palim says.
Fannie Mae researchers say they expect rents to grow between 2% and 2.5% next year as more multifamily construction is completed, slower than both home price growth and wage growth.
For home affordability to truly improve, it's not enough for mortgage rates to go down. We need more homes to be built. And the good news is that more politicians say they're ready to make that happen.
"Housing affordability was actually a major issue in the election and both candidates were talking about it," Palim says. "So the challenges that people face have really broken through into the political conversation."
Palim says that state and local initiatives to build more homes have also ramped up in recent years, another good sign that we're on the path to a better, more balanced market.
But it will take years to build up a sufficient housing supply. If you don't want to wait that long, there are ways to carve out affordability right now.
The best time to buy a house is when your finances can handle it and when homeownership makes sense for your lifestyle and goals.
"I would 100% say do it based on your personal circumstances, not trying to time interest rates or home prices," Palim says.
Palim says that one of the big misconceptions a lot of first-time homebuyers have is that you need a 20% down payment to get into a home.
"If you're making a median household income, saving 20% down would be incredibly difficult," he says. "And you actually don't need to do that."
Some conventional mortgages allow down payments as low as 3%.
Palim also advises checking out your state's housing finance agency to see what homebuyer assistance is available to you. Many of these agencies offer affordable HFA loans that come with down payment assistance.
Many lenders also offer first-time homebuyer mortgages and assistance, which can make homeownership more affordable for first-time and low-income buyers.
Getting quotes from more than one mortgage lender can help you get a lower mortgage rate and save on closing costs. A 2022 paper co-authored by Palim found that borrowers who didn't get multiple mortgage quotes paid $1,430 more than borrowers who did.
