The housing market has taken a steep downturn, with homebuyer demand plummeting to its lowest level in three decades. Mortgage applications to purchase homes have dropped 63% from their pandemic peak, a decline that mirrors levels last seen in 1995. This dramatic decrease in demand highlights a critical shift in the market.
Data from the first week of January 2025 shows that mortgage applications are down 14% from the same week last year, 19% from 2023, 54% from 2022, 59% from 2021, and 52% from 2020. These figures paint a stark picture of the current state of the housing market, despite recent actions by the Federal Reserve to cut rates. Over the past four months, the Fed has introduced three rate cuts, yet these efforts have not spurred the expected recovery in homebuyer interest.
Compounding the issue is the aftermath of the presidential election, which some anticipated would bring stability and renewed confidence to the market. However, the anticipated bounce-back has not materialised. Existing home sales have mirrored the decline in mortgage applications, although not to the same extent, largely due to a modestly sustained demand from cash buyers. According to the National Association of Realtors (NAR), about 25% of all transactions at the close of 2024 were cash deals, up from the pre-pandemic norm of around 20%.
As we step into 2025, the housing market faces a precarious situation. Sellers, encouraged by the rate cuts and the resolution of the election, may have expected a revitalised market. However, the persistently low demand suggests otherwise. This scenario raises the possibility of a wave of price reductions as the year unfolds, especially as the principal issue remains a lack of affordability for the average buyer.
Currently, a typical homebuyer in the United States faces a mortgage payment that consumes nearly 40% of their gross income. This level of financial strain has only been seen twice in recent history, during the housing markets of 1981 and 2006. In both cases, subsequent years saw an improvement in affordability due to significant shifts—either a steep drop in mortgage rates or a crash in home prices.
Today’s high mortgage rates are fuelled by soaring treasury yields and persistent inflation expectations. Despite these challenging conditions, home prices nationally remain up year-on-year, driven by inventory shortages in certain areas. However, the market is beginning to show signs of weakness in specific regions. Notably, states such as Texas, Florida, Tennessee, Colorado, Arizona, Utah, Alabama, and Georgia are starting to experience price declines. These areas had some of the lowest price growth towards the end of 2024, indicating a shift that could soon spread to other markets.
Looking ahead, it is possible that national home price growth could slow significantly in 2025, potentially stabilising around 0-1% year-on-year. This trend, if realised, would mark a considerable deceleration from previous years. The softening market conditions in sun belt and mountain west states could signal a broader cooling across the country, especially as affordability pressures continue to mount for prospective homebuyers.
The housing market faces a complex array of challenges as 2025 begins. The combination of low demand, high mortgage rates, and affordability issues presents a tough environment for both buyers and sellers. The trajectory of home prices in the coming months will be closely watched as an indicator of the market’s health and potential recovery paths.