• The infamous "lock-in" effect that's restricting home supply may be going away next year.
• Realtor.com's chief economist expects more homeowners to list their homes for sale in 2025.
• High levels of home equity and life changes will encourage home sales, Danielle Hale said.

2024 has been a tough year for homebuyers.

Affordability levels are still low with elevated home prices and mortgage rates. A huge jump in mortgage rates to around 6.8% today from under 3% in 2022 has also created a "lock-in" effect, where existing homeowners don't want to sell into a higher mortgage rate environment than when many of them bought — further limiting home inventory coming onto the market and sending prices soaring even higher.

There's reason to be optimistic, though. The US housing market will see more favorable buying conditions in 2025, according to Danielle Hale, chief economist at Realtor.com. Hale sees two trends that will help encourage existing homeowners to put their homes up for sale.

Existing homeowners have built up home equity

Existing homeowners have reaped big home equity gains in recent years thanks to rapidly rising home values.

Homeowners are also increasing their home equity by making monthly mortgage payments, as those who bought houses a few years ago have had the opportunity to make a sizable dent in their mortgage, Hale said. Homeowners with a smaller mortgage balance may be less sensitive to the higher interest-rate environment of today's housing market.

According to Lawrence Yun, chief economist of the National Association of Realtors, homeowners are feeling richer now thanks to the home equity they've accumulated over the last few years of dizzying home price increases. As a result, more listings are being put on the market.

Homeowners can put their home equity to work when they move and buy a new house.

"If they're using their home equity to make a move, that enables them to either be a cash buyer or take out a very small mortgage," Hale said. "That gives them a bit more flexibility in today's market."

Mortgage rates may become less important to buyers and sellers

Homebuying decisions can also be influenced by factors other than mortgage rates or home prices, according to Hale.

The more time that passes since a homeowner's initial purchase, the more likely it is that they'll have a life change requiring them to move, regardless of the cost of moving, Hale said.

People buy houses for reasons other than financial ones, Hale pointed out. Big life changes that could spur a move include a new job, retirement, marriage, or having children.

"All of these can be reasons that people might make a move even if the costs are more expensive to buy a home," Hale said.

Additionally, consumers might be getting accustomed to high mortgage rates, according to Redfin.

"Buyers realized mortgage rates may not drop below 5%, and probably not below 6%, in the near future," Mimi Trieu, a Redfin real-estate agent, said. Existing homeowners holding off on moving due to high mortgage rates may soon give up on waiting it out.

A more "buyer-friendly" housing market

These changes won't be immediate, but they will have a noticeable impact on the housing market, according to Hale. She believes that the housing market is trending in a more "buyer-friendly direction."

"It's going to take more time," Hale said of the lock-in effect. "But as it diminishes, that's going to free up more sellers."

Lower interest rates — and subsequently, lower mortgage rates — would certainly speed up the erosion of the lock-in effect, Hale said. However, even if mortgage rates hover around the 6% range in 2025, which is what Realtor.com expects, the lock-in effect will still fade.

Homebuyers could see a notable change by the end of next year, Hale predicted.

"In mid-2024, 84% of homeowners with a mortgage had a mortgage rate under 6%. We think that by the end of 2025, that share will be 75%," Hale said.

• The red-hot US housing market could cool off slightly in 2025, making it easier to buy a home.
• Expect stable or declining mortgage rates and more housing inventory, according to Redfin.
• However, it's still prohibitively difficult for younger homebuyers to break into the market.

The American dream of home ownership has become increasingly harder to achieve in the last few years. Home prices are elevated, mortgage rates are high, and housing supply is constrained. That's not to mention the growing threat of climate change, which is driving up housing costs such as insurance, HOA fees, and property taxes in high-risk states.

There's both some good and bad news on the horizon for homebuyers, according to housing market experts.

The good news? On the whole, it'll be easier to buy a house in 2025. But the bad news, for younger homebuyers at least, is that's mostly just the case for boomers. Homeownership is actually looking as distant as ever for first-time buyers, especially Gen Z and millennials.

3 reasons it'll be easier to buy a house in 2025

First, housing prices are projected to increase slower than in previous years. Redfin economists Daryl Fairweather and Chen Zhao predict that median US home-sale prices will rise by 4% in 2025. Goldman Sachs has a similar outlook for 2025, predicting that US home prices will increase by 4.4%. That's roughly in line with median wage growth. Considering that US home prices shot up over 40% between March 2020 and January 2024, this sanguine prediction is good news for prospective homebuyers.

Another impediment to homeownership has been high mortgage rates, which have more than doubled in the last few years. The average 30-year fixed mortgage rate has risen from below 3% in 2021 to around 7%.

While a 7% rate is still high historically, it's a sign of improvement from this housing cycle's high of 7.8% in October 2023. And rates could come down further in 2025, according to housing market experts. Redfin expects mortgage rates to stay the same or decrease next year. Realtor.com forecasts mortgage rates to end 2025 at 6.2%.

Lastly, experts predict that new housing inventory will hit the market, bringing relief on the supply side. A Republican sweep in Congress is a positive sign for homebuilders, as the construction industry will benefit from fewer regulations, according to Redfin.

In October before the election, Jeffery Roach, chief economist of LPL Financial, said that an increase in housing starts, or construction of new residential housing units, was a signal for more single-family homes hitting the market over the course of the next few quarters. According to Realtor.com, housing starts for new single-family homes could hit 1.1 million in 2025, a 13.8% increase.

All of these factors could improve the housing market going into 2025. Redfin predicts that home sales will increase anywhere between 2% and 9% next year.

No houses for young homebuyers

But unfortunately, if you're a first-time homebuyer, you're probably out of luck. Redfin doesn't expect the increase in home sales to be driven by young or working-class buyers. It's looking likely that any new housing inventory that hits the market will go toward older Americans first.

"Instead, affordable homes will be snapped up by older buyers who are priced out of higher price tiers," Fairweather and Zhao wrote in a recent report.

Indeed, first-time homebuyers are having unprecedented difficulty in the housing market. It's typically more difficult for first-time buyers to purchase a home because they don't have funds from selling a previous home to use for a down payment and mortgage payments, Redfin said in a June report, but today's housing environment is especially hostile towards young buyers.

Wages simply haven't kept up with the pace of home price increases over the past five years. According to Elijah de la Campa, a Redfin senior economist, the cost of starter homes have increased twice as fast as incomes during that time. Additionally, for Gen Z and millennials, student loans and credit card debt are emerging as roadblocks to homeownership, as it's difficult to qualify for mortgages with a poor credit score and high levels of debt.

As a result, the median age of first-time homebuyers is now 38, according to the National Association of Realtors — an all-time high. That's up from 35 in 2023. First-time homebuyers are also an increasingly smaller proportion of the market, at just 24% in the 12-month period ending in June 2024. The year prior, that proportion was 32%.

Comparatively, boomers have an advantage in the housing market. According to Edward Yardeni, president of financial research firm Yardeni Research, boomers own roughly half of the nation's net worth and homeowner equity, giving them a leg up in the housing market. Now, as boomers age and look to downsize their homes or move elsewhere for retirement, they can take advantage of the home equity they've amassed from years of home ownership.

"Gen Zers, meanwhile, will keep living with family or renting until well into their 30s," wrote Fairweather and Zhao.