The real estate market is expected to recover next year and buyers will opt for smaller homes, Zillow said. Mortgage interest rates can remain unpredictable.

SEATTLE – Mortgage rates are once again in the spotlight as 2025 approaches. Zillow predicts a more active real estate market and more buyers will take over in 2025, but those looking to buy — or even refinance — should prepare for a bumpy ride and be ready to act when the conditions are right.

“Buying a home in 2024 has been surprisingly competitive given how high the affordability hurdle has become. More inventory is likely to be released in 2025, giving buyers a little more breathing room,” said Skylar Olsen, Zillow chief economist. “Americans are adapting to skyrocketing costs by favoring comfort, a term that has been thinly disguised in real estate jargon for so long. Many also view renting as a longer-term lifestyle. A construction boom has eased pressure on rents. “Rent affordability will improve next year as long as wages continue to rise.”

Housing market activity will pick up

Expect more sales and only modest property value growth in 2025 as the market begins to falter.

Zillow forecasts home value growth of 2.6% in 2025, a relatively slow pace similar to this year’s growth. For existing home sales, Zillow forecasts 4.3 million next year, up slightly from 4.1 million in 2023 and the forecast 4 million in 2024.

While affordability challenges remain, buyers should expect more homes on the market, meaning more time to explore their options and more leverage in negotiations.

Mortgage rates will fall (then rise, then fall again)

There are signs that mortgage rates will fall in 2025, but as we saw in 2024, mortgage rates rarely follow the expected trend. What is more certain is that buyers can expect numerous ups and downs throughout the year.

Mortgage rates fell in September, briefly pushing the share of affordable homes to its highest level in 19 months. They have since risen back to almost 7%1, changing the affordability picture for homebuyers. More such fluctuations are expected in 2025, with refinancing sprints occurring during downturns.

Buyers’ markets will expand to the southwest

Currently, 13 major metropolitan areas are buyers’ markets — where buyers have the upper hand in negotiations, according to Zillow’s Market Heat Index — with most of them in the Southeast. Zillow predicts buyers’ markets will expand across the Southwest in 2025 as inventory continues to stagnate in relatively affordable markets.

If mortgage rates fall more than expected, the prospect of buyers’ markets expanding westward diminishes. It is expected that a significant decline in mortgage rates would bring more buyers than sellers into the market, increasing competition and shifting bargaining power in favor of sellers.

Americans love living in small houses

The pandemic-era need for more and more space is over. Home buyers will increasingly choose smaller homes as they offer a more sustainable, affordable and desirable way of life.

The term “cozy” is appearing in more and more property descriptions – 35% more in 2024 compared to 2023 – reflecting current design trends that have shifted from cavernous, open floor plans to enclosed spaces with their own style and purpose.

Last call for rental concessions

Apartment renters have enjoyed a relatively benign market this year, at least compared to the record rental growth in 2022. Rent growth has held steady at a reasonable pace, and the share of rental listings on Zillow offering a concession – such as free rental weeks or free parking – is up a record high. Zillow expects renters won’t have as many opportunities to negotiate for that free month of rent by the end of next year.

The boom in multi-family home construction is the main reason for the increase in concessions. More multifamily properties are coming onto the market than at any time in the last 50 years, forcing property managers to compete for tenants. These fireworks are expected to fizzle out in 2025, especially in the second half of the year.

Pet-friendliness will no longer be a negotiable for property managers

Renters are getting older and not putting off “adulting” milestones like moving in together or getting a pet before buying a home. The average age of renters has risen to 42, and they are becoming increasingly accustomed to the renter lifestyle – fewer renters are considering buying this year, which is understandable given the conditions that make renting a more affordable option in many markets.

With 58% of renters having a pet – up from 46% pre-pandemic – it’s no wonder that almost half said they passed on a particular property because it wasn’t pet-friendly. In today’s more competitive rental landscape, banning pets can keep property managers on the safe side.

Source: Zillow

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