In 2025, inflation is more than just a number on a chartits reshaping where and how Americans live.
A market that feels less predictableand more personalthan ever.
This affects housing in several ways.
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One major connection is through interest rates.
For homebuyers, that translated into higher mortgage rates, making buying a house more expensive.
There is hope that if home-price growth slows, it will help ease inflation.
But as inflation accelerated, the Federal Reserves rate hikes caused mortgage rates to skyrocket.
Experts predict mortgage rates will stay high throughout 2025, likely bouncing around the 7% mark on average.
The Impact of Higher Rates
Higher mortgage rates dramatically increase the monthly cost of buying a home.
In other words, buyers get much less house for the same payment when rates are high.
Mortgage rates have been unusually volatile.
This marks the 20th straight month of annual price increases.
Another analysis found prices rose roughly 2.9% from February 2024 to February 2025, slightly outpacing general inflation.
America has been grappling with a housing shortage for years, and it remains severe.
Economists estimate the U.S. was short around 5 million homes as of 2023.
That said, the pace of price growth has definitely slowed.
Many markets that saw skyrocketing values in 20202021 have cooled off.
2024 was a breather year with much smaller home-price increases, a trend expected to continue into 2025.
Redfin expects roughly a 4% increase for the year.
All these forecasts point to much slower appreciation than in recent years.
In some areas, prices may even plateau or dip slightly.
Wages have increased in this inflationary period, but not as fast as the cost of owning a home.
Over 76 million households lack the income needed to qualify for a mortgage on a home at that price.
But todays buyers are often looking at numbers well above that.
Consumer Sentiment
Surveys reflect this dismal affordability outlook.
These numbers underscore the frustration felt by young adults and families who feel locked out of the market.
The Lock-In Effect
Another factor squeezing the market is the lock-in effect.
Since moving would mean taking on a new mortgage at 67%, many homeowners simply stay put.
About 58% of homeowners with a mortgage have rates below 4% way below current rates.
According to Fannie Mae, this lock-in effect has contributed to existing-home sales dropping near 30-year lows in 2024.
Regional Differences
Inflations impact is not uniform across all regions.
Local housing markets behave very differently based on supply, demand, and local economies.
The West saw more moderate price growth, around 3.6% year-over-year.
In parts of Florida to Texas, prices actually dropped in 2024.
However, builders face inflationary pressures too.
New vs.
Existing Inventory
Interestingly, inventory of new homes for sale is much higher than inventory of existing homes.
Builders in growth areas particularly in the South and Mountain West have been very active.
The Rental Market Response
Inflation has hit renters hard, although in somewhat different ways than homeowners.
Throughout 2022 and 2023, rents across the U.S. soared as inflation picked up.
Shelter inflation, which includes rent, was running around 5% annually at the end of 2024.
Signs of Relief for Renters
There are signs of relief for renters in 2025.
One reason is that many new apartment buildings from the pandemic construction boom are now opening up.
Theres been a flood of inventory in the rental market from this building boom.
As a result, rent growth has slowed dramatically.
Some areas may even see rents flatten or fall slightly.
A Renters Market?
Redfins economists call 2025 a renters market.
Regional differences apply to rentals too.
Meanwhile, in certain coastal cities where building new rentals is very difficult, rents are still climbing.
They envision rates perhaps falling into the mid-5% range by 2026 if the economy has a mild slowdown.
However, even a 5-6% rate is higher than what buyers enjoyed in 20192021.
Price and Sales Projections
For home prices, experts predict slow growth nationally.
Fannie Mae expects around +34% for 2025.
Zillow is a bit lower at +2.6%.
Zillow forecasts about 4.3 million existing-home sales in 2025, up from an estimated 4.0 million in 2024.
Redfin similarly predicts a small increase in sales (maybe on the order of +5% year-over-year).
We see it in the stubbornly high mortgage rates that make every purchase more expensive.
We see it in home prices that havent fallen but are rising at a much slower pace.
We feel it in the affordability squeeze that has sidelined many would-be homebuyers.
While its been a tough environment, there are signs that the worst may be behind us.
Inflation is gradually coming under control, and as it does, interest rates should follow.
More inventory could help ease the supply crunch.
If inflation continues to recede, the intense pressure on the housing market should also ease.
