In some ways, now is a challenging time to take the plunge and buy your dream home. Many homeowners who locked in ultra-low mortgage rates a few years ago continue to stay put — limiting the supply of homes for sale — and it remains to be seen how the new presidential administration’s policy decisions will affect the housing market.
But the general consensus among some of the country’s most respected housing economists is this: If you need to buy, then buy. And if you do decide to buy, make an informed decision.
“Trying to time the housing market is a fool’s errand,” says Joel Berner, a senior economist at Realtor.com. “The right time to move is the right time to move for you, as long as you can find a place that meets your budget and fulfills your needs.”
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.
Profit and prosper with the best of expert advice – straight to your e-mail.
Some people have no choice but to move. Perhaps they have a new job and are relocating to a new city. Maybe they have a new baby and need more space, or they got divorced and need less.
Others opt to move to improve their lifestyle — to be closer to work, for example, or to have a backyard for the kids to play in.
In early February, Nhu Vien Nguyen and her fiancé, Brian Timko, were on track to close on the purchase of a two-bedroom, two-bath condominium in Cambridge, Mass., after “watching and waiting” for months for a unit to hit the market in a building they love.
The commute is just 15 minutes to Timko’s job, and even though the couple are paying $845,000 for the unit and will be responsible for a monthly condo association fee of $693 in addition to their mortgage payment, the numbers work in their favor.
Nguyen says she previously paid $3,900 a month in rent, plus a $110 pet fee for her dog, Kevin. Now, the couple’s mortgage payment and association fee total $5,079, saving Nguyen $1,470 a month on her $2,540 share of the monthly expenses.
“We weren’t so concerned about interest rates because we can always refinance,” says Nguyen, 40, an insurance-industry client advocate. “But the inventory in that building in Cambridge is limited, and two-bedroom units don’t open up frequently.”
Housing market fundamentals
Supply and demand are the primary drivers of the housing market. When supply — the inventory of homes available for sale — is down, prices tend to go up. Conversely, when there is a glut of inventory on the market, buyers have many choices, and sales prices often drop as sellers compete.
Other factors that play into the outlook include the state of the job market, consumer sentiment, fiscal policy, interest rates and inflation.
While most economists agree that the U.S. economy is strong, the housing market faces headwinds. Some buyers are hesitant to commit to a long-term mortgage when rates are hovering around the 7% mark, so they’re postponing a purchase in the hope that rates will drop later this year or next year. That reduces the demand for homes.
Those who either purchased or refinanced during the peak of the COVID-19 pandemic — back in 2020, when mortgage rates averaged 3.11%, or 2021, when they were 2.96%, according to LendingTree — are reluctant to sell and give up their low rates.
According to Redfin, homeowners are staying in their homes nearly twice as long as they did in 2005, a trend that’s driven largely by older adults planning to age in place.
And according to a Redfin survey released in January 2025, more than one-third of U.S. homeowners said they will never sell their home — further evidence of the constraints on the inventory of existing homes available for sale, and a factor that is likely to increase home prices further. Realtor.com forecasts that home sale prices will increase by 3.7% this year.
Despite the challenges, some positive signs are emerging. A Realtor.com monthly housing report released in January showed a promising change in seller activity, as the number of newly listed homes increased 37.5% month over month.
And Morgan Franklin, a real estate agent with Coldwell Banker Realty in Boston, says that the buyers he represents are now putting in offers after being on the fence for months.
“All of a sudden, people are starting to pull the trigger,” he says. “I think it’s because they are learning that they can’t wait for interest rates to come down.”
Realtor.com forecasts that the inventory of available homes for sale will grow both for existing homes (with an expected growth rate of 11.7%) and for newly built homes (expected to increase 13.8%) in 2025.
That would help create the first balanced market in nine years, meaning that neither buyers nor sellers would have a competitive advantage, according to Realtor.com.
Of course, all real estate is local, so expect to see differences depending on where you live. Limited inventory in a particular market may keep prices high, with buyers vying for available properties. A glut of new homes for sale could have the opposite effect.
Mortgage rates outlook
Mortgage rates are a key factor that drive demand for housing. If buyers perceive rates to be too high, they’ll stay on the sidelines. But mortgage rates may never return to the levels buyers enjoyed in 2020 and 2021, experts say.
“There is a lot of uncertainty in the debt markets right now, driven mostly by the potential for higher inflation from tariffs and tax cuts that could significantly increase the nation’s debt,” says Ken Johnson, a housing economist and the Christie Kirkland Walker chair of real estate at the University of Mississippi School of Business Administration.
“That uncertainty should result in a bumpy road for mortgage rates in the next six months to a year, so my advice to home buyers is this: If you see a rate that you are happy with, you might want to lock it in now.”
Depending on which new policies the Trump administration implements — tax cuts, blanket tariffs or mass deportations — mortgages may trend well above 7% later in 2025, according to a LendingTree outlook.
Sam Khater, chief economist for Freddie Mac, notes that mortgage rates have averaged between 6% and 7.5% for most of the past two years. He predicts that the average rate for a 30-year, fixed-rate mortgage will drift down closer to 6.5% by the end of 2025.
“That’s predicated on slower economic growth,” he says. “We expect inflation to moderate some, but not much. So I think there is some room for rates to come down, but I don’t think they’re going to drop to the low sixes — at least not this year.”
While potential buyers may balk at a rate of 7%, rates have been much higher in the past. Fixed rates on 30-year mortgages peaked at more than 18% in the 1980s, and over the past 45 years, they’ve averaged 7.48%, according to Freddie Mac.
So a 7% rate is on par with the historical average since 1980.
Use the tool below, from Bankrate, to explore and compare interest rates:
Paying for your house
The best move you can make to keep your home purchase affordable is to save up as much as possible for a down payment. That will reduce the amount you have to finance, as well as your monthly housing expense.
Thanks to the economy’s strength and the rapid rise in home values since the end of the Great Recession in 2009 — the median sales price of a home increased from $222,900 in the first quarter of 2010 to $419,200 in the fourth quarter of 2024, according to the Federal Reserve Bank of St. Louis — many existing homeowners are sitting on a substantial amount of home equity that will be freed when they sell their current homes.
These funds can be applied to the down payment on their next home. According to Intercontinental Exchange (ICE), a technology and data provider, at the end of the third quarter of 2024, the average homeowner with a mortgage had $319,000 of equity.
If you need a mortgage, get quotes from different lenders. According to a Freddie Mac analysis, buyers can potentially save $600 to $1,200 annually by applying for mortgages from multiple lenders.
Laine Edathikunnel, 35, a communications manager at a construction company in Kansas City, and her husband, Tom, are searching for a home in the $500,000 to $600,000 range.
After renting in New York City for many years, the couple — who now have a 3-year-old son and 1-year-old daughter — relocated to Kansas City, where Laine grew up.
Although they were initially preapproved for a mortgage that would allow them to buy a much pricier home, Laine became concerned when she realized how an interest rate of about 7% would affect their monthly mortgage payment.
The couple are now looking at smaller and older homes than they did at first to keep their monthly housing expense at a more comfortable level.
“We don’t need a 4,000-square-foot home, which was the size we could get with our initial price point,” Laine says. “Just going from a 1,500-square-foot apartment to a 2,200-square-foot home will still feel like a huge upgrade to us.”
The National Association of Realtors just ranked Kansas City among its top 10 hot spots for the 2025 housing market, so the Edathikunnels are aware they’re trying to buy in a highly competitive market.
“I don’t want to delay,” Laine says. “We can always refinance, so I think it’s not worth renting for one more year to wait for the interest rates to change.”
Tips for buyers and sellers
Buyers should purchase a home when the time is right for them — if they find a home they love at a price they can afford. Don’t overextend your budget, which can put you at risk if you lose your job or have some other change in your financial status.
Before you start shopping for a home, get preapproved for a mortgage so you know how much you can afford.
Berner, the Realtor.com economist, advises buyers to evaluate the climate risks associated with a property as well. When you look up a home on Realtor.com, you can see data on the risk of flooding, fires, high temperatures and more.
If you find that a home is in an area prone to flooding or wildfires, think twice about owning it. Plus, in certain parts of the country, it may be too expensive or even impossible to secure homeowners insurance because of high environmental risks.
Those interested in buying a newly constructed home will find that many builders are offering buyers incentives, such as mortgage-rate buydowns or free options or upgrades.
“New homes also feature modern materials and systems, requiring less maintenance,” says Odeta Kushi, deputy chief economist for First American Financial Corp. “Buyers can customize their homes, and new homes often come with warranties and modern amenities.”
A January 2025 report from Realtor.com states that list prices for newly built homes in the fourth quarter of 2024 were down year over year, while new-construction inventory levels continued to improve, making new homes an attractive option, particularly in markets where the inventory of existing homes for sale is low.
But new homes, which incorporate building products such as lumber from Canada and gypsum (used for drywall) from Mexico, are likely to get more expensive if the U.S. imposes tariffs on imports from those countries for a prolonged period.
And if mass deportations take place, that would reduce the number of construction workers available to build homes. So if you’re planning to buy a new home, it might be prudent to sign a contract and lock in a price sooner rather than later.
If you own a home and are thinking about selling it, the advice is similar to that for buyers: If you have to sell — say, because of a change in your job or family situation — then sell.
If the sale is discretionary, however, give it some thought. Find out what your house is worth and consider the expenses that come with selling, including commissions paid to real estate agents, any capital gains taxes due on the proceeds, closing costs and moving expenses. You might just find that it makes more financial sense to stay than to move.
“Do some investigative work,” says Maria O’Dell, a real estate agent with Real Broker in Overland Park, Kan. “Can you envision yourself aging in the home? Consider tapping some of your equity and remodeling your house so you can stay there long term.”
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
Related content
Source link
Add a Comment