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Are Sellers Returning? The Lock-In Effect May Be Fading
Recent data from Realtor.com indicates a shift in the housing market, as more sellers are re-entering the market. In Q4 of 2024, new listings increased 6.1% year-over-year in December, marking the most significant jump since June 2021. Active listings also surged over 23% in mid-December, a potential sign that the so-called “lock-in effect” is loosening.
This increase in inventory could be the first step toward market normalization, offering more opportunities for buyers and investors who have been waiting for a better time to enter the market. However, interest rates remain high, hovering just below 7%, tempering expectations of a dramatic shift.
Homeowners and Investors Are Running Out of Patience
For nearly two years, both buyers and sellers have been hesitant to make moves due to economic uncertainty, high mortgage rates, and fluctuating home values.
Real estate consultant Dana Bull, in a statement to CBS News, noted a marked increase in seller interest:
“I have between 15 and 18 sellers considering listing their homes this spring—more than I’ve ever had going into a new year. Many of these individuals have been waiting for nearly 18 months but are now realizing that external factors may not improve anytime soon. As a result, we’re likely to see an uptick in inventory, though nothing too extreme.”
While higher interest rates remain a concern, buyers are also showing renewed interest. Lawrence Yun, Chief Economist at the National Association of Realtors, told The Wall Street Journal that:
“Sales have gained momentum over the past few months as buyers and sellers grow tired of waiting for rates to drop and instead move forward with their plans.”
What’s Next for Home Prices? A Dip in 2025, Followed by Growth in 2026
Investment firm Morgan Stanley projects that national home prices will likely decline by 2% in 2025 before rebounding in 2026.
According to Jim Egan, Morgan Stanley’s Head of Housing Market Research:
“The housing market remains on solid ground, and we do not expect a significant correction in home prices. Instead, the anticipated increase in inventory will lead to a brief period of zero or slightly negative appreciation before the market returns to a growth phase.”
By 2026, home prices are expected to appreciate by 3%, making 2025 a potential buying opportunity for investors who plan to buy low and hold for the expected rebound.
Increased Inventory Could Help Stabilize Prices
More homes entering the market, combined with persistently high mortgage rates, could cause a temporary softening in home prices, supporting Morgan Stanley’s prediction.
Additionally, Realtor.com forecasts an 11.7% increase in housing inventory in 2025. However, even with this increase, inventory will still be 23% below pre-pandemic levels, indicating that demand could still outpace supply in some markets.
How to Capitalize on the 2025 Market
Investors looking to maximize opportunities in 2025 should focus on long-term planning and financial stability. Here’s what to consider:
- Assess Your Financial Position
If your goal is to invest for tax benefits and long-term appreciation, ensure you have:
- A stable income that can sustain low or negative cash flow.
- A strategy that does not heavily depend on immediate returns.
If your investment relies on short-term cash flow with minimal financial flexibility, waiting may be a safer strategy.
- Define Your Investment Strategy
- For BRRRR investors (Buy, Rehab, Rent, Refinance, Repeat): High interest rates and potentially low cash flow properties could make this a risky strategy unless you have sufficient reserves.
- For long-term investors: Those with strong financial positions can acquire properties now, take advantage of future appreciation, and refinance when rates eventually decline.
- Understand Your Risk Tolerance
- If covering unexpected expenses or mortgage payments on a vacant property causes significant stress, consider a house-hacking strategy instead.
- Alternatively, look for affordable investment properties in decent markets where you can pay cash and avoid financing risks.
- Flip Homes You Can Afford to Hold
- Luxury flips will remain risky due to higher mortgage rates limiting buyer demand.
- Investors should focus on entry-level homes, which remain in high demand despite interest rates.
- If unable to sell immediately, ensure you can carry the holding costs until 2026, when prices are projected to rebound.
Expert Insight:
Brittany Webb, Director of Research at the National Housing Conference, highlights the growing demand for affordable homes:
“For years, we have seen the gradual disappearance of the starter home. This has made it particularly difficult for first-time homebuyers to find properties in desirable areas.”
This trend presents an opportunity for investors to focus on flipping or renting starter homes, as demand remains high.
The Impact of the LA Wildfires on Real Estate
The recent wildfires in Los Angeles have displaced over 100,000 residents, adding additional demand for rental properties. Many affected individuals may:
- Seek rental housing within the LA area.
- Relocate to nearby cities with lower housing costs.
This event will exacerbate California’s ongoing housing crisis, presenting potential opportunities for investors in markets positioned to accommodate displaced residents.
Final Thoughts: 2025 Is a Year to Prepare for 2026
The real estate market in 2025 is not expected to see a dramatic rebound but rather a gradual shift in inventory levels and price trends.
For investors, the best strategy is patience and strategic positioning:
- Identify high-quality deals while the market remains relatively quiet.
- Focus on properties that can be resold or refinanced in 2026 when appreciation is expected to return.
- Avoid high-risk investments that rely on quick sales in uncertain conditions.
With economic, political, and market uncertainties still in play, a cautious and calculated investment approach will be key in 2025.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“
Are Sellers Returning? The Lock-In Effect May Be Fading
Has the U.S. Housing Market Finally Begun to Thaw After the Pandemic?
It seems like the housing market might be showing signs of life. According to a recent report from Redfin, pending home sales in early October have seen their largest year-over-year rise since 2021, with a 2% increase in the four weeks ending October 6.
This news is likely to be welcomed by real estate investors who have felt the market has offered limited opportunities over the past few years. However, it’s important to take a cautious approach—one promising statistic doesn’t necessarily indicate a broader trend.
Is the Housing Market Truly Recovering?
Let’s explore the different factors at play.
Interest Rate Reductions: A Critical Factor or a Red Herring?
The Redfin report links the surge in pending sales to the Federal Reserve’s much-anticipated rate cut announcement in mid-September. According to Redfin, this announcement prompted buyers to re-enter the market in late September, despite mortgage rates having already been falling for weeks before the cut.
This psychological boost is crucial. Although buyers were aware of the falling rates beforehand, many seemed to be waiting for a formal signal to act. This could be attributed to a lingering fixation on the ultra-low rates of 3% to 4% that buyers enjoyed before 2022.
Any rate cut announcement serves as a nudge for prospective buyers, making them feel that now might be the right time to purchase, even if mortgage rates had been decreasing already. In an unstable mortgage market, such announcements hold significant influence.
However, mortgage rates are just one piece of the puzzle when analyzing housing market performance. As noted by Investopedia, the real estate market is driven by four primary factors: interest rates, demographics, economic conditions, and government policies.
Demographics: Shaping the Market
During the pandemic, demographic shifts had a profound effect on U.S. real estate, with major population movements like the Sunbelt migration fueling booms in cities such as Phoenix and Austin, which later became unaffordable for many.
Age is another key demographic factor, and the millennial generation’s pent-up demand continues to be a driving force behind the rise in home purchases. Despite the challenges of the past few years, millennials who have longed to become homeowners are now entering the market in greater numbers, as more properties become available.
Rising Inventory: A Sign of Stabilization
A key factor contributing to the market’s stabilization is the growth of housing inventory over the last year. The pandemic had a significant impact on the availability of homes, with sellers hesitant to list properties due to COVID-19 restrictions and, later, higher mortgage rates.
Some homeowners, particularly those upgrading to larger homes, found it financially challenging to sell and take on higher mortgages. Others, however, simply chose to wait for a more favorable market.
Although the latest Realtor.com report shows that inventory remains down by 23.2% compared to pre-pandemic levels, we are seeing an upward trend. For instance, new listings have been rising since last year, with a 5.7% year-over-year increase for the four weeks ending October 6.
As of September 2024, some states have even surpassed their pre-pandemic inventory levels, including Tennessee, Texas, and Idaho, with others, like Washington, close behind.
Vulnerabilities in Certain Regions
However, not all regions are showing positive signs. For example, some areas, particularly those affected by extreme weather, have seen inventory spikes not because of market recovery, but due to homeowners trying to offload damaged properties they can’t afford to repair.
For instance, regions like Florida and North Carolina, hit by hurricanes, have experienced increases in home listings, but these may reflect a response to climate-related challenges rather than market health.
Opportunities for Investors
Investors should be discerning when choosing markets, focusing on regions where inventory is growing due to increased home construction rather than climate-related distress. States like Idaho, Utah, North Carolina, and Texas, which are building new homes, offer potential, though caution is needed in areas prone to natural disasters.
The Midwest and Northeast, meanwhile, still face significant challenges in recovering to normal market conditions. These regions have lower rates of new construction, meaning inventory remains scarce, which could present both opportunities and difficulties for investors.
The Bottom Line
The U.S. housing market is showing signs of recovery, but the situation remains complex and varies by region. Interest rates play an essential role in unlocking the market, but investors should also consider other critical factors, such as homebuilding trends, climate risks, and government policies. While the market is heading in the right direction, it’s crucial to examine regional differences carefully before making investment decisions.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“