The U.S. Housing Market in 2025
A Shifting Landscape
Hi all,
The following was originally published in the Weekly Observations report for Strom Capital Management which was sent to clients last week. I wanted to give you all the chance to read it as well. Enjoy!
The U.S. housing market stands at a critical juncture in early 2025, with mounting evidence suggesting we are entering a period of significant transition. Recent data paints a picture of a market that has meaningfully shifting away from the seller-favorable conditions that have dominated recent years. This evolution brings both challenges and opportunities for various market participants, requiring a nuanced understanding of the changing dynamics.
The traditional metrics we use to evaluate housing market health are sending mixed signals, creating a complex narrative that deserves careful analysis. While nominal home prices have shown remarkable resilience, maintaining levels near historic highs, this surface-level stability masks deeper structural changes occurring in the market. The combination of elevated mortgage rates and high home prices has fundamentally altered the affordability equation for many potential buyers, creating ripple effects throughout the housing ecosystem.
Additionally, with home prices and mortgage rates at such elevated levels, we’ve also seen this take a toll on affordability, which continues to remain near all-time lows.
On top of that, the cost of home ownership compared to renting, though down slightly from 2022 highs, remains significantly above the historical average.
Source: John Burns Research & Consulting
Supply Dynamics: A Telling Shift
Perhaps the most significant change in market dynamics can be seen in housing inventory levels. Current data shows supply running at 8.5 months, notably above the historical average of 6.1 months. This represents a marked departure from the supply-constrained environment that characterized the market in recent years. The implications of this inventory build-up are far-reaching, suggesting a gradual shift in negotiating power from sellers to buyers.
Moreover, we are seeing the effects of increased supply in the labor markets. Job openings in the construction sector have plummeted over recent months and are likely to remain under pressure as companies slow their plans to build.
The current market environment presents a particularly challenging affordability picture. The convergence of elevated home prices and higher mortgage rates has created a situation where monthly payments often consume an outsized portion of household income. This affordability constraint is not merely a temporary obstacle but rather a structural challenge that may require significant market adjustment to resolve.
While national trends provide important context, housing markets remain inherently local, and regional variations tell an important story. Coastal markets, particularly those with high concentrations of technology and financial services employment, are experiencing more pronounced inventory buildups. Meanwhile, some secondary markets, especially those benefiting from migration trends, show greater resilience in terms of both price stability and absorption rates.
As we look ahead, several key factors will likely influence the market's trajectory. The Federal Reserve's monetary policy decisions will continue to impact mortgage rates, while broader economic conditions, particularly employment and wage growth, will play crucial roles in determining housing demand. Local factors, including supply additions and regulatory changes, will shape individual market outcomes.