Key Real Estate Market Shifts and Challenges for 2025

After two years of market uncertainty, 2025 could mark a turning point for real estate. Yes, challenges like mortgage rates, affordability concerns, and inventory shortages still remain, but we are seeing signs of recovery. 

Real estate veterans and economists predict moderate mortgage rates, increased house sales, and shifting buyer demographics and these shifts will shape the 2025 market. 

The biggest factor driving real estate in the coming years will be mortgage rates. 

If rates stay high, buyers and sellers will only move out of necessity—guided by job changes, financial shifts, or life events. But if rates drop faster than expected, pent-up demand could surge, driving transaction volumes up.

Plus, we can fairly guess political and economic shifts will impact housing trends further. 

The ongoing geo-political turmoils around the globe and the 2nd term of President Donald Trump will surely impact policies fueled by sanctions, tax cuts, tariffs, immigration restrictions and other policies. 

Let’s check out the expert predictions for 2025. 

Home Sales will Rise, But Growth will be Slow

Home sales are forecasted to rise this year but growth will stay limited due to high mortgage rates, affordability concerns, and other economic uncertainties. 

According to Zillow’s predictions, home values may grow by 2.6% in 2025, a modest increase similar to 2024’s trend. The platform also forecasts 4.3 million existing home sales, slightly up from 4.1 million in 2023 and 4 million in 2024.

Experts expect homebuyers will have more options as inventory levels improve. This means buyers will have more time to make decisions and increased negotiation power. However, affordability challenges will persist.

Mortgage Rates & Economic Factors Will Shape Demand

The Federal Reserve doesn’t anticipate inflation will reach its previous 2% target until 2026. This means short-term interest rates are going to stay up throughout 2025. 

Mortgage rates—heavily influenced by the 10-year Treasury yields—could remain above 6% and discourage some buyers from entering the market.

What remains to be seen is how the new policies under the Trump 2.0 administration—such as tariffs and immigration restrictions—impact construction costs. 

Shifting Buyer Sentiment & Market Recovery

Despite these challenges, buyer sentiment is improving. 

The Fannie Mae Home Purchase Sentiment Index reached its highest level since February 2022, and Redfin’s Homebuyer Demand Index showed a 7% year-over-year increase in early December, 2024.

Key forecasts from industry leaders include:

National Association of REALTORS® (NAR):

• 2025 Sales Projection: Existing home sales up 9% YoY; New home sales up 11% YoY.
• 2026 Sales Projection: Existing home sales up 13% YoY; New home sales up 8% YoY.

Redfin:

• 2025 Forecast: Existing home sales to reach 4.1M – 4.4M (2% – 9% YoY increase).

While home sales are expected to gradually rise, sustained high mortgage rates and affordability pressures will keep growth below pre-pandemic levels. 

Inflation: We’re Yet to See Some “Good Numbers”

Mortgage rates are unlikely to return to 3%, but there is a chance it could drop to the high-5% range by the end of 2025–if inflation continues to ease.

While the economy has shown strong growth, inflation has not surged significantly, this is a positive sign. 

If this trend continues, GDP growth could stay above 3%, and inflation could fall closer to 2.5%. In that scenario, mortgage rates might decline to around 5.5% or 6%, though it’s a completely optimistic projection.

Office Vacancies & Adaptive Reuse

The demand for office space has plummeted since the pandemic. 

It has led to double-digit vacancy rates in major cities like New York City and San Francisco. By the end of 2024, U.S. office vacancies reached nearly 16-20%. 

This has impacted property values, tax bases, and city finances. 

In response, building developers are now looking to repurpose vacant office spaces for residential, healthcare, and educational uses. This adaptive reuse trend could help revitalize urban areas, but the challenges remain. 

Challenges of Office Conversions

Converting offices into housing sounds like a logical solution, but the process is costly and complex. Let’s not forget office buildings are usually designed in a specific way that’s incompatible with residential use. This means the property requires much renovations to meet the housing codes and make it livable.

The pandemic has taught us a lot. Experts now predict urban planning will see a generational shift, where outdated office spaces transition into mixed-use developments, reducing vacancies and reshaping city landscapes for better utilization. 

However, success depends on how the policies and financial feasibility support these renovation projects. 

Soaring Insurance Costs

Inflation, rising property values, and an increased natural disasters have hiked insurance premiums and this may remain a challenge for property owners in 2025. 

These costs are particularly impacting residential real estate, hospitality, and senior living properties. The following data gives a better idea how natural disasters impacted insurance prices: 

• $380 billion in global economic losses from natural disasters in 2023
• Only 31% of these losses were covered by insurance, leaving insurers with billions in claims 
• Increasing frequency and severity of extreme weather events are making insurers more reluctant to taking risks 

How Property Owners are Adapting

Once things are clear–the traditional insurance models are becoming unsustainable. Property owners are shifting their focus to:

• Risk management strategies to minimize exposure
• Rightsizing coverage to ensure adequate but cost-effective protection
• Alternative risk transfer solutions, such as self-insurance or catastrophe bonds

We can expect some policy adjustments, new regulations, and changes in coverage options. However, property owners will surely take a proactive approach to counter insurance premiums rise such as risk mitigation and adopting innovative solutions to control escalating costs. 

Geopolitics and Regional Wars 

Ongoing geopolitical turmoil continues to create economic uncertainty. 

While the Gaza conflict has ceased for the time being, there’s no telling when we will reach a conclusive end in the Russo-Ukraine war. These regional conflicts will continue to affect real estate: 

• Supply chain disruptions affecting construction materials 
• Rising energy and commodity prices will further hike inflation 
• Labor shortages due to slower migration and workforce movement 

• Investors will price in greater risk, leading to increased capitalization rates (cap rates) 
• Less predictable market cycles 
• Supply chain disruption and rising material costs are slowing down new developments

Mortgage Rates Expected to Stabilize in 2025

Mortgage rates will remain a key factor in the 2025 housing market. 

While the Federal Reserve has already made two rate cuts and plans for more, mortgage rates are unlikely to fall due to inflation risks and a large U.S. budget deficit.

Here are some forecasts: 

• 30-year fixed mortgage rates: fluctuated between 6.08% and 7.44% in the past year. In the best-case scenario, rates will dip to 5.5%-6% if inflation slows
• The most likely scenario is that rates will stay in the 6% range throughout 2025
• In the worst-case scenario, economic shocks will push rates higher, keeping affordability low 

• Currently, 86% of homeowners have a mortgage rate below 6%, resulting in a reduced housing inventory
• More life-driven moves (job changes, family needs) will increase listings in 2025 

Builders are adapting to filling the supply gap by offering incentives like rate buydowns and closing cost assistance.

Plus, we are seeing a rise in multifamily rentals that’s easing the pressure in some markets.

Buyers can expect: 

• Mortgage rate volatility—timing will be key factor 
• Slightly more inventory, giving better opportunities 
• Affordability to remain a challenge, but can expect a a gradual market balance 

Home Prices to Increase Slowly after Rapid Growth

Home prices have surged over the past five years and boosted homeowners’ wealth significantly. But this has also left buyers struggling with affordability. 

According to the National Association of Realtors (NAR), a typical homeowner has gained $147,000 in housing wealth in just five years. This has further widened the wealth gap between homeowners and renters.

• Median net worth of homeowners: $415,000
• Median net worth of renters: $10,000

Why Home Prices Will Keep Rising, But More Slowly

Home prices are expected to increase at a more moderate pace in 2025 and 2026 due to persistent inventory shortages and steady demand.

• 2025 median home price: $410,700 (+2% over 2024)
• 2026 median home price: $420,000 (+2% over 2025)
• Redfin’s prediction: A 4% price increase by the end of 2025

Homebuilders will Benefit from Housing Shortages

A low existing home inventory and continued demand are paving the way for newly built homes in the market. 

In recent months, new construction has accounted for 30% of overall housing inventory, nearly double its historic share.

Here’s what homebuilders can expect: 

• Limited resale listings will push more buyers toward new construction
• While housing starts peaked at 1.5 million in 2022, they have settled at an annualized rate of 1.3 million—still above pre-pandemic levels
• 9.5 months’ New single-family Homes supply now available (vs. 4.2 months for existing homes)
• 25% of unsold new homes are fully built, giving better price negotiation opportunities 

To attract buyers for new homes, institutionalized builders will use mortgage rate buydowns, closing cost assistance, and design center allowances.

Regulatory and Economic Factors Impacting Builders

• A Republican-controlled government is eyeing to boost builder confidence, with fewer regulations expected 
• Apartment construction is expected to recover after 2024 slowdown 
• Even if inflation lowers, rates may remain elevated
• With 30% of construction workers being immigrants, tighter immigration policies could reduce labor supply

Climate Risks will be Priced into Homes

Climate change is becoming a major factor in home valuations with each passing year. This is particularly evident  in the disaster-prone regions like Florida, California, and Texas. 

As extreme weather events become more frequent, buyers are rethinking where they invest, shifting demand toward lower-risk areas in the Midwest and Northeast.

Key Market Trends

• Home Prices May Decline in High-Risk Areas
  • Coastal Florida, wildfire-prone parts of California, and hurricane-impacted Texas will likely see slower price growth or even declines
  • Higher insurance costs and increasing risk assessments will make these areas less attractive to buyers
• Migration Trends are Changing
  • More Florida homeowners are leaving after recent hurricanes like Helene and Milton
  • Out-of-state buyers are less interested in moving to Florida due to high insurance premiums and rebuilding costs
• Who Will be Able to Stay
  • Wealthier buyers who can afford higher insurance premiums or pay cash for repairs will dominate these markets
  • Middle- and lower-income buyers will likely seek safer, more affordable regions with fewer climate risks

Major Cities will Take Action to Attract Residents Back

After years of population declines in major coastal cities, local authorities will likely implement some pro-business policies and public safety measures to help revive downtowns and retain residents.

Key Drivers of Urban Recovery

• San Francisco elected a pro-business Democrat as mayor
• Portland, OR pledged to end unsheltered homelessness
• Other major cities in Blue states are adopting tough-on-crime policies to improve safety
• Large corporations are mandating on site jobs restoring demand for urban living

• ADU (Accessory Dwelling Unit) boom in Los Angeles and the Bay Area is adding affordable housing
• Slower home price growth is making California more attractive for residents 

Declining Appeal in Sun Belt Cities

• Phoenix and Las Vegas have seen rising home prices alongside worsening climate conditions, reducing affordability advantage

Gen Z Redefines Homeownership in 2025

Unlike the previous generations, Gen Z is shifting away from traditional homeownership. 

While lower-priced homes are expected to be in high demand, it won’t be younger buyers leading the charge.

Instead, older buyers priced out of higher-end homes are expected to purchase more affordable properties. 

Meanwhile, Gen Zers will continue renting or living with family well into their 30s, and use the money to invest in other wealth-building strategies other than real estate.

This shift underscores a changing American Dream—one where financial flexibility and alternative investments take priority over the long-term homeownership.

Real Estate Commission Procedures will Undergo Major Changes

The NAR has implemented new rules on real estate commissions. These new policies alter how sellers and buyers compensate agents, particularly impacting the luxury housing market, where large commission amounts have traditionally allowed for greater negotiation.

The luxury real estate deals will likely see more commission reductions due to room for negotiation. 

Key Changes to Real Estate Commissions: 

• MLS platforms now prohibit automatic commission-sharing between listing and buyer’s agents
• Sellers are no longer obligated to offer compensation to a buyer’s agent

• Buyers will need to sign agreements with their agents upfront
• If no purchase offer is made, no brokerage fees will be owed

• Some appeals are still pending regarding the national agreement
• The Justice Department under Trump’s second term may push for additional reforms

How the Industry is Adapting

• eXp Realty, the largest brokerage by agent count, launched a new listing form that clearly states no commission sharing with buyers’ agents
• The Consumer Federation of America endorsed eXp’s approach while remaining critical of California’s version
• Zillow introduced its own Tour Agreement to formalize buyer-agent relationships

This means buyers may need to negotiate and pay for their own agent representation, rather than relying on sellers’ commissions. 

Agent compensation will be more flexible and shift toward more competitive pricing models.

The Clear Cooperation Policy Faces Growing Challenges

The Clear Cooperation Policy (CCP), introduced by the National Association of Realtors in 2020, requires listing brokers to submit new listings to the MLS quickly to maximize buyer options. 

However, increasing resistance from large brokerages and local listing systems is putting this policy under pressure.

What’s Causing the Pushback?

• Exclusive Office Listings:
  • Brokers can register properties without publicly listing them on MLS
  • These listings are shared privately within the same brokerage to maximize commissions
  • Some brokers never register listings at all, bypassing MLS exposure
• Concerns about Fair Market Access
  • Buyers and sellers benefit from MLS as a comprehensive marketplace—removing CCP could undermine that
  • Other countries lack a unified MLS system, forcing buyers to search multiple brokerage websites, reducing efficiency
  • Listing hoarding could become a key business model, prioritizing brokerage profits over consumer access

Industry Reactions & Future of CCP

• Some large brokerages want CCP reformed or eliminated to gain more control over listings
• eXp Realty’s CEO, Leo Pareja, acknowledged the potential business benefits of private listings but warns that dismantling CCP could harm the market
• Without CCP, transactions could become more fragmented, less transparent, and even prone to fraud

Total Cost of Homeownership Becomes a Bigger Factor

For prospective homebuyers, the cost of homeownership extends beyond mortgage payments, as property taxes, insurance, maintenance, and climate-related adaptation expenses add to the financial burden.

• Total annual homeownership costs have surged nearly 26% between March 2020 and March 2024, reaching $18,000 per year ($1,510/month), according to Bankrate
• The cost to finance a median-priced home now stands at $2,278 per month, bringing the total cost of homeownership to $3,800 per month
• Renting remains significantly cheaper, with the average rent for a single-family home at $2,236 per month, nearly 30% less than owning

Homeowners Association (HOA) Costs Add Complexity

• Over 75 million Americans live in HOA-governed communities, and this number is growing
• The national average HOA fee is $259/month, but special assessments in poorly managed communities can bring unexpected financial strain
• Buyers in HOA communities should review governing documents, financial statements, and research before committing 

Housing Shortage Expected to Persist Through the End of 2020s

Both the U.S. and Canadian housing market face a supply shortfall. The US shortage accounts for up to 4.5 million homes and estimates indicate an approximately 3.5 million home deficit in Canada. 

Even as homebuilders ramp up construction, and the governments are pushing for more home accessibility policies, challenges like land availability, labor shortages, and material costs will keep progress slow.

The National Association of Home Builders (NAHB) projects that pent-up housing demand will not be fully met until 2025–2030.

• Skilled labor shortages and supply chain constraints remain major hurdles 
• A decline in legal immigration post-pandemic could further reduce the workforce availability 

What It Means in the Long-Run

• The housing shortage is expected to keep home prices elevated through the decade
• Affordability challenges may persist, especially for first-time buyers 
• By 2030, demographic shifts—including an aging population—could begin to reduce overall demand 

Buyers’ Markets Expected to Expand to the Southwest

As inventory levels rise in relatively affordable markets, buyers’ markets—where buyers have more negotiating power—will spread beyond the Southeast into the Southwest, according to Zillow’s market heat index.

Where Buyers will Gain the Advantage

• Currently, 13 major metro areas are classified as buyers’ markets, mostly concentrated in the Southeast
• As more homes become available, the Southwest is expected to see increased inventory
• Increased housing supply in these areas will give buyers more options and force sellers to price more competitively

What Could Change This Forecast?

• Mortgage rate drops could delay this expansion of buyers’ markets. If rates fall more than expected, demand could surge, bringing more buyers than sellers back into the market–shifting negotiating power back to sellers
• If inventory growth slows, competitive pressure on buyers could keep markets balanced rather than favoring only one side 

People are Embracing Small-Home Living

The post-pandemic demand for larger homes is already waning and buyers are shifting toward smaller, more affordable, and sustainable living spaces.

Key Trends 

• The term “cozy” appeared in 35% more home listings in 2024 than in 2023, reflecting a move away from expansive plans toward functional spaces
• Smaller homes are becoming more desirable as they offer affordability and energy efficiency 
• Condos in urban areas are stabilizing in value after declines caused by remote work

Renters Face a Shifting Market 

The rental market remained relatively stable in 2024, a stark contrast to the record-breaking rent increases seen in 2022. However, major changes are forecasted in the coming years 

Key Rental Market Trends

• In 2024, Zillow reported a record high in rental concessions, including free rent and parking, as landlords competed for tenants
• More apartment units hit the market in 2024 than in the past 50 years
• Redfin predicts the median asking rent will remain unchanged year over year in 2025, making rent payments more affordable 
• With many units from the pandemic building boom now completed, landlords may continue offering concessions to attract tenants 

• Apartment rents may dip in the first half of 2025 due to oversupply but rebound in the second half as demand stabilizes
• Single-family rental prices may rise at a faster pace than apartments

Pet-Friendliness Becomes a Must-Have for Renters

The rental market is seeing a growing demand for pet-friendly housing. Here’s why Pet-Friendly rentals matter in 2025: 

• Pet ownership among renters has surged to 58%
• The median age of renters has risen to 42, with many embracing long-term renting rather than rushing into homeownership 
• Fewer renters considered buying in 2024, largely due to affordability concerns 
• Nearly half of renters have passed on a property because it wasn’t pet-friendly 

What This Means for Property Managers

• Not allowing pets will pose a major disadvantage in the 2025 rental market, as competition for tenants is increasing 
• Landlords and property managers may need to adapt by offering pet-friendly policies, designated pet areas, or flexible pet deposits 

A New Wave of Home Buyers Emerge 

Home buyer profile is evolving influenced by rising home prices, economic shifts, and changing lifestyle preferences. 

NAR’s 2024 Profile of Home Buyers and Sellers highlights some key trends redefining who is purchasing homes—and how they’re doing it: 

• All-Cash Buyers Surge
  • A record high 26% of home sales in the past year were all-cash transactions
  • 31% of repeat buyers paid all cash by leveraging equity 
• First-Time Buyers are Older and Saving Longer
  • The median age of first-time buyers hit an all-time high of 38 as affordability challenges push further 
  • 25% of first-time buyers relied on gifts or loans from family or friends
  • 20% tapped into financial assets like stocks, 401(k)s, or cryptocurrency
  • 7% used inheritance money, the highest percentage recorded 
  • To combat rising costs, first-time buyers put down the highest down payments in nearly 30 years—9% on average 
• City Living Makes a Comeback
  • After years of suburban migration, urban home purchases saw their biggest uptick in a decade as more buyers return to city centers
• More Buyers are Pooling Resources
  • 17% of home sales were for multigenerational households, an all-time high
  • Buyers are combining incomes for cost savings, to care for aging parents, or to accommodate young adults moving back home 
• Single Women Dominate Solo Purchases
  • 24% of home purchases were made by single women, compared to just 11% by single men
  • Declining marriage rates and rising financial independence are driving this trend

Buyer Demand – A Steady but Seasonal Trend

Buyer demand in the real estate market remains resilient and we predict seasonal patterns stay in charge.

• 28.6% of homes sold above their listing price in September 2024 
• Since 2022, demand has followed a cyclical trend—rising in summer and declining in winter 

What to Expect in 2025

• If mortgage rates continue to drop, more buyers may re-enter the market
• Persistent affordability challenges could keep buyers on the sidelines
• Supply growth may help stabilize bidding wars 

Buyers’ and Sellers’ Market?

Is it going to be a buyer’s market?

Not yet. 

A true buyer’s market happens when there are more homes for sale than buyers but housing inventory is expected to remain tight in 2025. However, the market is cooler than the past years, giving buyers more choices and less competition.

Buyers should be patient and act strategically, taking advantage if mortgage rates dip. 

So, is it going to be a seller’s market? 

Yes, but not as extreme as in past years. 

Demand still outpaces supply, which means sellers can expect quick sales at strong prices—as long as they price competitively. Here’s what we can expect:

• Homes will continue to sell near asking price in most markets 
• Well-priced homes in high-demand areas will sell quicker 
• Overpriced homes to sit longer time on market 
• Competition is slowing, but prices remain high due to inventory shortages
• Buyers will be more cautious and patient and act strategically 

Will There be a Lot of Foreclosures in 2025?

The foreclosure rate has already declined by 13% year-over-year in the third quarter of 2024, with 87,108 total foreclosures recorded. 

The downward trend suggests that a wave of foreclosures in 2025 is improbable.

What This Means for Homeowners

• The market won’t be flooded with distressed properties 
• No need to worry about foreclosure-driven price drops in neighborhood 

What This Means for Home Buyers 

• Foreclosure bargains will be rare, so if you’re holding out for a cheap distressed property, you may need to wait longer  
• If you do find a foreclosure, be ready for potential repair costs and understand the risks involved 

Will the Housing Market Crash in 2025?

Given all the signals we talked about – only a miracle can do that!

Yes, affordability remains a challenge and yet home prices are projected to rise, albeit at a slower pace.

The reason being supply and demand fundamentals holding strong.

• Despite recent gains, the housing supply is still below pre-pandemic levels, keeping prices elevated 
• Millennials and Gen Z continue to enter the housing market, driving home buying activity
• A strong labor market and gradual mortgage rate declines may keep demand stable

Artificial Intelligence in Real Estate: The Next Big Shift

Almost all sectors are embracing artificial intelligence (AI) at an unprecedented pace, and real estate is not an exception. 

AI-powered tools are revolutionizing how market analysis is done and investment decisions are made. However, challenges due to data fragmentation, accuracy, and implementation hurdles remain. 

How AI is Transforming Real Estate

1. Professionals are using AI algorithms to analyze market trends, rental growth, and home pricing fluctuations with greater accuracy 
2. AI-powered platforms, such as Alpaca RE, scrape transaction records to identify pricing opportunities
3. Agents are using AI for automated property valuations, although experts warn that accuracy checks are still necessary
4. AI is helping real estate investors identify undervalued properties and optimal locations 
5. JLL GPT, an AI-powered large language model, is particularly popular for space utilization and leasing insights
6. AI is automating leasing workflows, tenant screening, and maintenance predictions
7. Chatbots and virtual assistants streamline customer interactions and inquiries

It’s important to remember that AI may not always factor in location-based nuances, such as proximity to mass transit or local economic conditions.

The Future of AI in Real Estate

• 76% of real estate companies are still in the early stages of AI adoption 
• 50% believe they are at least 1-3 years away from realizing AI’s full potential 
• 88% plan to increase AI investments in the next 12-18 months, with automation being a top priority 

Conclusion 

Real estate is going to see some big shifts in the coming years, especially in terms of technological innovations and how professionals, homeowners and home buyers approach the changing landscape. 

We hope this article helped you get a grasp of the market changes in the coming years and beyond. 
Our team is skilled at real estate intel gathering, skip tracing, bulk property data collection. Give us a call at 804-256-8312 or set up a meeting to learn more.

Authored by Arjun