The housing market is facing a stark reality check, with sales of existing homes plummeting to a 29-year low.
The National Association of REALTORS reports that 2024 witnessed the slowest pace of existing home sales since 1995—the era of dial-up internet and Windows 95.
This chilling statistic underscores a complex issue: the confluence of scarce inventory and escalating prices, creating a perfect storm of housing unaffordability.
In 2024, the count of existing homes sold dropped to a mere 4.06 million, and the median sale price hit a record peak of $407,500, according to NAR.
The market is struggling with a severe supply shortage that continues to drive up prices to unsustainable levels.
The mortgage rate maze: why homeowners are staying put
The crux of the issue is deeply intertwined with mortgage rates.
About 80% of existing home loans are locked in at rates below 5% as of September 2024, according to CoreLogic.
It is understandable that current homeowners are loath to move from those favorable rates, especially when swapping for a current rate closer to 7% which is where average 30-year mortgages have been stuck for months.
“We’re in that trap ourselves,” Victor Currie, a California-based real estate agent told Fortune.
Our mortgage is under 2%, and it’s hard to justify giving that up until we decide to downsize or leave California and use the built-up equity to buy the next property in cash.
The allure of low-interest mortgages is keeping a significant portion of the market on the sidelines, further restricting the already limited supply of homes for sale.
Hope on the horizon? Inventory gains and new construction
Despite the gloomy picture, there is a glimmer of hope for those looking to buy in 2025.
Realtor.com predicts a surge in existing home inventory by springtime, projecting an 11.7% increase compared to 2024.
However, the solution is not as simple as increasing the inventory.
While more new construction is important, it’s not a magic bullet for the housing market’s woes.
Sarah DeFlorio, vice president of mortgage banking at William Raveis Mortgage, told the Fortune that high prices on new inventory, coupled with high mortgage rates are making the market difficult for aspiring buyers.
“It would be impossible to build enough to meet the immense need, and the very high costs of construction mean that a lot of the new product hitting the market is not affordable for your typical American family,” says DeFlorio.
She believes, “We would need to see rates dip into at least the low 5’s before people holding these low rates will even consider making a move.”
Moreover, local factors like zoning restrictions and recent wildfires, such as those in the Los Angeles area, are further delaying progress and making the situation worse, according to Currie.
“With all the regulatory hurdles we have, this region is already notoriously slow for construction and development,” says Currie.
Just getting enough qualified labor to rebuild the decimated areas is going to be a challenge, much less creating new housing to meet the demand from population growth.
New builds: a piece of the puzzle, but not a panacea
New construction can offer a respite, but its impact varies depending on the location and affordability.
According to Fortune, Jennifer Beeston, mortgage lender and senior vice president at Rate.com, highlights that while some markets offer new builds in the $200,000 to $300,000 range, regions with the most severe shortages often lack such developments.
The complexities of new builds do not end there, Beeston adds, “A lot of people are looking at new construction as a silver bullet, but it’s not.”
Prospective buyers must also thoroughly research builders to ensure the quality of construction.
Despite the overall slowdown in the existing home sales market in 2024, the last quarter of the year demonstrated an encouraging uptick.
The NAR noted that sales hit their highest point since February in December.
According to DeFlorio, even in difficult markets, life events like “marriage, kids, divorce and death” drive transactions.
Unlocking the market: creative solutions to the “lock-in” effect
The market is currently constrained by a “lock-in” effect, which will continue to impact the market until mortgage rates drop below 6%, says Beeston of Rate.com.
“I feel like 5 is the magic number, but anything below 6 you’re going to start to see movement,” she explains.
She suggests that addressing the market will require creative solutions from both government and lenders.
“Until the government comes up with something to give us incentive to sell, you’re going to see this continue to happen,” she says.
Examples of such solutions include the “portable mortgages” seen in Canada and Britain, allowing homeowners to transfer their existing mortgage to a new property.
Beeston also floats the idea of banks offering lower-than-market rates to customers with existing lower rates who want to move—a move that could potentially stimulate the market.
Navigating the 2025 housing market: strategies for buyers
While the housing market is challenging, there is hope for prospective homebuyers.
DeFlorio’s advice is, “It is very important not to try to game the rate market. Instead of focusing on what the rate is, pay more attention to the monthly payment as that is what is going to impact your bottom line.”
With careful planning, a keen understanding of the market, and the help of a knowledgeable agent, buyers can still find good options.
Beeston shares the story of a military veteran in Columbia, South Carolina, who was able to use a VA loan to purchase a $330,000 property with no down payment and a monthly payment that was competitive to the rental costs in the area.
She concludes with an encouraging statement, “There’s a lot of opportunity right now—it’s just you have to look for it.”
The post The great housing freeze: why the housing market hit a 29-year low and what’s next appeared first on Invezz
