Key Points:

• Affordability is likely to improve by year end, but will remain historically constrained.
  
  
• Higher inventory levels in Southern and Western markets will put more downward pressure on prices, moving these markets towards more buyer-friendly conditions.
  
  
• Existing-home sales will be driven by “life happens” events, but will remain limited by the lock-in effect and economic and labor market uncertainty.

• New-home sales will remain a relative bright spot, though rising headwinds will challenge the segment
  
  
  

The housing market is diverse and multifaceted. Not only is real estate inherently local, but even within a local market, there are distinct segments, such as new and existing homes. Currently, the housing market is gradually rebalancing toward a new, more buyer-friendly real estate cycle. Our outlook for the remainder of the year is based on several key assumptions regarding mortgage rates, house prices, and the overall state of the macroeconomy. Elevated mortgage rates and lingering economic uncertainty continue to frustrate the housing market, but it’s rebalancing, not busting, and in doing so setting the stage for a new real estate cycle.

“While 2025 may not end in a boom, it won’t be a bust either. It’s a slow, steady march toward balance.”

Affordability Eases Off Historic Lows

Affordability hinges on mortgage rates, house prices, and household income. By year-end, we expect affordability to improve compared to last year, though it will remain historically constrained. Below is the outlook breakdown for each of these components:

Mortgage rates: Industry estimates suggest an average 30-year, fixed mortgage rate of 6.6 percent by year-end, with a range of 6.4 percent to 6.7 percent. If inflation dips closer to the Federal Reserve's 2 percent target or the labor market weakens, the Fed may implement its forecasted two 25-basis point rate cuts. Housing is highly sensitive to mortgage rates, so even modest shifts in mortgage rates can have outsized effects on affordability. But we may see mortgage rates soften ahead of any Fed action. For instance, in mid-2024, mortgage rates fell ahead of the Fed's 50-basis-point cut in September, as markets anticipated easing. A similar trend has already emerged, as mortgage rates have dipped since the July jobs report data indicated a softening labor market and increased market expectations that the Fed will cut rates as early as September. Buyers might see mild rate relief and improved affordability even earlier as markets continue to adjust.

Household Income: Although household income growth is expected to slow, it should still outpace national annual house price growth. The quits rate, which correlates with wage growth, has fallen below pre-pandemic levels, indicating downward pressure on wages. Slower, but still positive wage growth will help boost affordability in the second half of the year.

House Prices: National home price growth remains positive, but muted — low single digits — and we expect this trend to continue in the second half of the year. House prices are influenced by supply and demand dynamics. When demand exceeds supply, prices rise, and vice versa. As of June, house prices declined in 20 of the top 50 metro markets compared to a year ago, with many of the steepest declines in Texas, Florida, Arizona, and California. Prices slowed or even fell in many Southern and Western markets, while prices accelerated in Northeastern and Midwestern markets. As inventory rises in Southern and Western markets, we expect prices to soften further, improving affordability. Conversely, Northeastern and Midwestern markets may see the strongest price growth unless supply increases.

Overall, affordability is likely to improve slightly compared to the end of 2024, but will still remain over 30 percent less affordable than in early 2022, before the Fed started increasing rates. Local variations will persist, with markets experiencing stronger inventory growth shifting closer to a buyer-friendly environment.

Existing-Home Market: Driven By “Life Happens” Events, But Hindered by Dual Lock-In Effects

From early 2022, just before the Fed began its inflation fight, to early 2023, existing-home sales dropped nearly 40 percent. Since then, existing-home sales have remained at, or close to, a 4 million annualized and seasonally adjusted sales rate. While the pace of sales has stabilized, it is likely to remain near this level for the rest of this year. Many homeowners refinanced during the pandemic and now enjoy ultra-low mortgage rates—averaging 4.1 percent. With current market rates near 7 percent, moving means trading a low monthly payment for a significantly higher one, creating a financial disincentive that has frozen many would-be sellers in place and slowed the turnover of existing-home sales. 

The frozen labor market has emerged as an additional lock-in effect. While the unemployment rate remains historically low, the job hiring rate has fallen to 2013 levels, when the unemployment rate was 7 percent. Job changes are a trigger for household moves. When fewer people are switching jobs, there’s less incentive to relocate, reducing both buying and selling activity in the housing market. 

Beyond the labor market, broader macroeconomic uncertainty has also unsettled potential buyers and sellers. According to a June 2025 survey by the New Home Trends Institute at John Burns Research & Consulting, 37 percent of homeowners and renters believe the U.S. is currently in a recession, and nearly half are delaying home purchases due to economic uncertainty. This underscores how sentiment, not just fundamentals, shapes today’s housing market dynamics. 

While financial considerations are crucial in the decision to buy or sell a home, lifestyle choices and events, such as diplomas, diapers, divorce, downsizing, and death, also play a significant role. These "life happens" events will continue to drive sales, but they won't be enough to fuel a significant increase in sales activity.

Real estate moves in cycles, and while existing-home sales have flatlined at trough levels, that bottom may serve as the dawn of a new cycle. If we define the start of a cycle as the point when the decline ends, then we’ve already crossed that threshold. Sales activity has stabilized near a 4 million annualized pace, suggesting that the market has found its floor. From here, even modest gains would represent the early stages of a recovery.  

New-Home Market: Still a Relative Bright Spot, But Facing Strengthening Headwinds 

The new-home market has been a relative bright spot in the housing market due to builders’ ability to offer incentives, such as mortgage rate buydowns. Yet, it’s very possible that new-home sales in 2025 will end the year below 2024 levels. Builder sentiment in July inched higher, but remained in negative territory for the fifteenth consecutive month. The general decline in builder confidence reflects affordability challenges, tariff-related building material cost uncertainty, and growing competition from rising resale and new-home inventories, especially in key builder markets such as Texas and Florida.

That said, it’s important to keep the recent sales data in context. The average level of new-home sales in 2024 was in line with 2019, which was the strongest year for new-home sales since 2007. Unlike the existing-home market, which continues to underperform relative to its pre-pandemic pace, the new-home market has shown relative strength, even if this year ends a bit lower. Builder incentives are likely to remain a key driver of new-home sales. Rate buydowns, price cuts, and other incentives have become powerful tools to help buyers overcome affordability hurdles, and builders are leaning into those strategies more heavily as market conditions tighten.

No Boom, No Bust…Just Balance

While the housing market isn’t poised for a dramatic rebound in the near term, it appears to have found the floor from which the next cycle will begin. We expect existing-home sales to remain subdued, and new-home sales may face some headwinds. But, with inventory rising and the potential for mortgage rates to soften modestly, there’s room for affordability improvements and price calibration. From here, even modest improvements in affordability, through slower home price growth, rising incomes, or eventual rate relief, could set the stage for a gradual rebound. While the path forward may be uneven, the worst of the adjustment appears to be behind us, ushering in the early phase of a housing market reset that could shift power back toward buyers. While 2025 may not end in a boom, it won’t be a bust either. It’s a slow, steady march toward balance.