The Housing Outlook: 2025

The US housing market has been underbuilding consistently since the 2007 housing bust, with the exception of a brief period during COVID. This trend initially made sense due to the overbuilding during the housing boom, driven by government incentives and subprime debt purchases by Fannie Mae and Freddie Mac. However, the continued underbuilding has led to a shortage of homes, with housing starts in November at a 1.289 million annual rate, below the necessary 1.5 million to meet population growth and housing scrappage needs.

As a result of this shortage, housing prices are expected to rise in 2025, despite broader economic challenges. The national Case-Shiller index showed a 3.7% annual increase in home prices for the first ten months of 2024, with similar growth anticipated for 2025. In 2024, single-family housing starts increased by approximately 6%, but multi-family starts fell by 25-30%, reaching a decade-low. A slight rebound in multi-family construction and continued growth in single-family starts are expected in 2025.

This increase in construction should modestly boost new home sales, which rose by 2% in 2024 compared to 2023, with similar gains projected for 2025. However, existing home sales are expected to remain stable at the 2024 rate of 4.05 million annually. Builders can adjust new home pricing to cope with higher mortgage rates, unlike existing homes, which are often priced higher to motivate sales from those with low-rate mortgages from 2020-21.

Overall, the housing market is not in a bubble and is expected to withstand economic slowdowns, suggesting a modest improvement in housing even as the US economy faces potential recessionary pressures.