How Growing Home Inventory Will Shape the Housing Market in 2025

As 2024 comes to a close, the U.S. housing market is experiencing notable shifts, with unsold inventory of homes rising nearly 27% compared to last year. Across the country, most regions have seen an increase in the number of homes available for sale, and several states now have more homes on the market than they did before the pandemic. Ten states have even surpassed 2019 levels, which was the last year considered "normal" before the housing market was upended by COVID-19. In some regions, the inventory is the highest it's been in over a decade. Even in areas with historically low inventory, like Chicago and New England, available homes are growing. Looking ahead, 2025 is expected to continue this upward trend, with inventory likely increasing by another 15%.

This raises the question: What happens when housing inventory keeps climbing year after year? How will this affect home prices in 2025?

Inventory Trends

Naturally, December sees a seasonal dip in housing inventory, with fewer homes on the market each week until February. Currently, there are around 682,000 single-family homes listed for sale nationwide, which is a 1% decrease from last week, as expected for the season. However, compared to December 2023, the number of available homes has grown by nearly 27%.

Looking at the long-term trend, we can see that we're finishing three consecutive years of rising inventory. This trajectory is expected to continue into 2025, gradually bringing us closer to the pre-pandemic "normal" levels. While there are 27% more homes on the market than last year, inventory is still 22% lower than it was at the end of 2018. During the 2010s, inventory consistently decreased due to historically low interest rates, but since the early 2020s, it has been growing year after year, driven by higher borrowing costs.

By the end of 2025, we should approach levels of inventory similar to those seen in the years before the pandemic. A major recession could potentially accelerate this growth in inventory, but it typically takes 9 to 12 months after a downturn to see its full effects on housing supply, meaning any recession-related surge would likely be seen in 2026 rather than in 2025.

Implications of Rising Inventory

What does this mean for buyers and sellers in 2025? The growing supply of homes means buyers will have more options, leading to less competition and potentially easing the pressure on prices in many areas. For sellers, however, the increased competition could make it harder to sell at the price they desire, especially in markets with rising inventory.

Additionally, there's speculation that inventory growth will be stronger in northern and midwestern states, driven by a potential resurgence in migration trends. After a slowdown in migration from the north to the south in recent years, there may be some rebound in 2025. This could help balance out the disparity between tight inventory in the northern states and more abundant supply in the south and west. However, this is a speculative trend that has yet to materialize fully, and much depends on factors like job market conditions and interest rate stabilization.

New Listings on the Market

In the week ending December 16, 2024, there were 45,000 new listings, which is 14% more than the same week last year. This is a notable increase and signals that more sellers are entering the market, closer to pre-pandemic levels. The trend of more listings each week compared to last year suggests that the real estate market is gradually moving past its pandemic-era constraints.

This increase in new listings, especially in northern states with historically tight inventory, further supports the idea that the inventory gap between regions could start to narrow in 2025. For example, markets like Dallas are seeing new listings at levels reminiscent of the 2010s, while cities like Chicago are still seeing relatively fewer new listings, although even there, the number of sellers is rising. This trend is expected to continue into 2025, helping to ease supply constraints in the coming year.

Pending Homes Sales

There were 47,000 new contracts for single-family homes in the last week, which is 3% more than the same week last year. While these numbers are typical for December, they do indicate a steady pace of sales. Currently, we are averaging about 50,000 new contracts per week, which is 10% more than last year. This points to a slight uptick in sales, and we expect sales to grow by about 5% in 2025 compared to this year. The forecast suggests around 4.2 million existing home sales in 2025.

Home Prices

As of the week of December 16, 2024, the median price for existing home sales was $375,000, showing a slight dip, which is typical for the winter months. The average price for homes across the U.S. this fall has been just under $384,000.

Looking at price trends over the last three years, there are two notable periods when home prices adjusted downward—June and October of 2022—as the market adjusted to rising mortgage rates. By contrast, when mortgage rates briefly dipped in late summer 2024, home prices saw a slight boost, indicating that mortgage rates play a significant role in buyer behavior. When rates are high, people tend to buy smaller or less expensive homes to optimize their monthly payments.

Based on current trends, we expect home prices to finish 2024 with a gain of around 5%, and we're projecting a 3.5% increase for 2025. If current trends hold, we might revise that upward in the first quarter of 2025.

Price Reductions

One metric to watch for signs of price adjustments is the price reduction rate, which currently stands at 38.2%—meaning 38.2% of homes on the market have taken a price cut from their original listing price. This is down slightly from earlier in the year but still elevated compared to normal levels. In 2022, over 40% of homes had price cuts at this time, but the current number is closer to historical norms.

While price reductions are a useful forward-looking indicator, we haven't yet seen significant price drops in many markets, including Florida, which has been dealing with high insurance costs and climate risks. However, Florida's seasonal market may influence future price trends, and it will be interesting to see how prices behave in early 2025.

What to Expect in 2025

Looking ahead to 2025, we expect continued growth in inventory and more balanced market conditions. While more homes will be available, there is still uncertainty about how regional migration and the broader economic landscape will shape supply and demand. Sellers and buyers alike should be prepared for an environment of greater selection and potentially less competition, which could mean slower price growth or even price reductions in certain markets.