- The challenging “lock-in” effect that has restricted home availability might start to fade in the coming year.
- The chief economist at Realtor.com anticipates an increase in homeowners listing their properties for sale in 2025.
- High levels of home equity, along with significant life changes, are expected to drive more home sales, as noted by Danielle Hale.
2024 has proven to be a difficult year for homebuyers.
Affordability remains low due to high home prices and mortgage rates. A considerable rise in mortgage rates to approximately 6.8% now, up from below 3% in 2022, has resulted in a “lock-in” effect, where many current homeowners hesitate to sell in an environment of higher mortgage rates than when they originally purchased their homes. This has further constrained home inventory on the market and driven prices even higher.
However, there are reasons for optimism. The housing market in the US is projected to offer more favorable buying conditions in 2025, according to Danielle Hale, chief economist at Realtor.com. She identifies two key trends that could motivate current homeowners to sell.
Existing homeowners have accumulated significant home equity
In recent years, existing homeowners have experienced substantial gains in home equity due to rapidly increasing home values.
Additionally, homeowners are building equity by making regular mortgage payments. Those who purchased their homes a few years ago have made substantial progress in reducing their mortgage balances, which may make them less sensitive to the higher interest rates currently affecting the housing market, as highlighted by Hale.
According to Lawrence Yun, chief economist of the National Association of Realtors, homeowners are feeling wealthier due to the equity they’ve gained from the recent surge in home prices, leading to an uptick in property listings.
Homeowners have the opportunity to leverage their home equity when moving to a new property.
“If they’re utilizing their home equity for the move, it can allow them to either become cash buyers or secure a much smaller mortgage,” Hale explained. “This provides them with greater flexibility in today’s market.”
Mortgage rates might become less significant for buyers and sellers
Decisions around homebuying can be affected by factors beyond mortgage rates and home prices, as stated by Hale.
The longer it has been since a homeowner’s initial purchase, the greater the chance that life changes will arise, driving them to move, irrespective of moving costs, according to Hale.
People often buy homes for reasons that are not solely financial. Major life events that might prompt a move include new job opportunities, retirement, marriage, or starting a family.
“These factors can lead individuals to consider relocation even if the costs of buying a new home are higher,” Hale mentioned.
Moreover, consumers might be getting used to high mortgage rates, as per Redfin’s observations.
“Buyers have come to terms with the reality that mortgage rates may not dip below 5%, and likely not below 6%, anytime soon,” noted Mimi Trieu, a Redfin real-estate agent. This suggests that existing homeowners who are delaying their moves due to high mortgage rates might soon decide to proceed.
A more “buyer-friendly” housing market
While these shifts may not occur overnight, they are likely to have a substantial impact on the housing market, as per Hale’s analysis. She believes the market is moving toward a more “buyer-friendly” atmosphere.
“It will take time,” Hale commented regarding the fading lock-in effect. “But as it gradually decreases, we can expect to see more sellers emerge.”
Reduced interest rates—and consequently, lower mortgage rates—could significantly hasten the decline of the lock-in effect, Hale noted. Nevertheless, even if mortgage rates remain around 6% in 2025, as anticipated by Realtor.com, the lock-in effect will still diminish.
According to Hale, homebuyers could witness a significant transformation by the end of next year.
“In mid-2024, 84% of homeowners with mortgages had rates below 6%. We expect that by the end of 2025, this percentage will drop to 75%,” Hale said.
