Zillow is predicting a significant shift in the housing market for 2025, with homebuyers likely to have more leverage, despite continued fluctuations in mortgage rates. The real estate platform expects a gradual uptick in housing activity, with home values appreciating at a slower pace and a more dynamic market overall.
"Purchasing a home in 2024 was more competitive than many anticipated, given the high affordability challenges buyers faced. However, we expect more housing inventory to become available in 2025, offering buyers a bit more breathing room," said Skylar Olsen, Zillow’s Chief Economist. "Americans are adjusting to the high costs by embracing 'coziness,' a term that has long been used to critique small spaces but is now being seen more positively. Many are also considering renting as a longer-term lifestyle choice. The construction boom we've seen has helped ease rent pressures, and rent affordability is expected to improve in the coming year, provided wages continue to grow."
Mortgage Rates Remain Unpredictable
While Zillow anticipates more housing activity in 2025, one challenge that will persist is the unpredictability of mortgage rates. While rates might dip in the early months of 2025, they will likely fluctuate throughout the year. Zillow's forecast suggests that mortgage rates will continue to rise and fall, making it crucial for homebuyers to be ready to act when rates are favorable.
The volatility in mortgage rates has presented challenges for buyers. For instance, when rates dropped in September 2024, the availability of affordable listings surged, only for rates to climb back close to 7% soon after. Zillow expects this kind of up-and-down pattern to continue throughout the next year, which could present occasional refinancing opportunities when rates temporarily dip.
Buyer-Friendly Markets and Regional Shifts
Zillow forecasts that in 2025, more buyer-friendly markets will emerge, particularly in the Southwest, where inventory continues to rise in more affordable regions. As competition among sellers increases, the need for strategic pricing and marketing of listings in these areas will become more crucial to attract potential buyers.
However, Zillow also warned that a sharp decline in mortgage rates could change the dynamics of the market, leading to more buyers entering the market and potentially shifting the power back in favor of sellers.
Smaller Homes and Evolving Rental Preferences
As the housing market shifts, so too are buyer preferences. Zillow predicts that smaller homes will continue to gain in popularity, with the term "cozy" now being embraced as a positive characteristic in home listings. This shift comes as buyers adjust to the current economic environment, where smaller, more affordable homes are in greater demand.
At the same time, the multifamily construction boom that has helped alleviate rent pressures is expected to slow down by mid-2025. As a result, Zillow predicts fewer rent concessions, such as free parking or discounted rent months, as competition among property managers decreases.
Meanwhile, the trend of pet ownership among renters is continuing to grow, with 58% of renters now owning pets. Zillow’s report highlighted that nearly half of renters have passed on properties that did not accommodate their pets, signaling the growing importance of pet-friendly policies in rental markets. As renters embrace longer-term living arrangements, property managers may need to adjust their offerings to stay competitive, particularly by accommodating pets and offering features that cater to changing lifestyles.
Looking Ahead: Adjusting to Market Shifts
As we move into 2025, Zillow’s outlook reflects a housing market in transition. While buyers may find a bit more flexibility and opportunity, they will still face the challenge of fluctuating mortgage rates. Homebuyers and renters alike will need to stay adaptable as market conditions evolve, including shifts in inventory, preferences for smaller homes, and the ongoing importance of pet-friendly policies in the rental market.
For potential homebuyers, being prepared for market fluctuations and understanding regional trends will be key to making informed decisions in the year ahead.
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