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Sellers Are Coming Back—Is the Lock-In Effect Finally Breaking?
Recent data from Realtor.com suggests a shift in the market: sellers are starting to list their homes again. In December, listings were up 6.1% year-over-year, marking the largest gain since June 2021. This could signal the loosening of the market and the breaking of the “lock-in effect,” where homeowners have been hesitant to sell due to high mortgage rates. If this trend continues, we may be witnessing the return of more normal conditions for the housing market, which haven’t been seen since before the pandemic.
Supporting this, active listings were up 23% in mid-December from the previous year, and new listings were showing strong growth. Dana Bull, a real estate consultant and agent with Compass, shared her perspective: Many homeowners who’ve been considering selling for the past 18 months are now ready to make their move, even if external factors like interest rates haven’t fully optimized.
It’s a welcomed shift, especially as mortgage rates remain just below 7%, despite recent cuts by the Federal Reserve.
Buyers and Sellers Are Running Out of Patience
As mortgage rates continue to hover around 7%, homebuyers and sellers are growing tired of waiting for rates to decrease. Lawrence Yun, the chief economist at the National Association of Realtors, pointed out that sales have gained momentum recently as both buyers and sellers are coming to the market regardless of interest rates. However, buyers also face the challenge of rising home prices, and investors are faced with the dilemma of whether to buy now and lock in future equity appreciation or wait for a possible rate reduction.
Home Prices Expected to Fall in 2025, Rise in 2026
According to Morgan Stanley, home prices are likely to dip by 2% in 2025. Jim Egan, head of housing market research at Morgan Stanley, emphasized that this is not a correction, but rather a dip in appreciation due to increased inventories. However, the firm predicts a 3% national price increase in 2026. This potential for lower prices in 2025 could make it an attractive time for investors to buy, especially for flippers who can rehab and sell in 2026 when prices are expected to rise.
Despite a projected 11.7% increase in home sales this year, the number of homes for sale will still be 23% below pre-pandemic levels, according to Realtor.com.
How to Make the Most of the 2025 Market
If you’re considering entering the market in 2025, especially with an eye toward 2026, here are a few tips to navigate the relatively quiet market:
- Analyze Your Financial Position: Ensure you have stable finances to absorb low cash flow if needed. It’s essential to avoid losing money each month.
- Clarify Your Investment Goals: If you’re considering strategies like the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method, make sure your finances are solid. Don’t overextend yourself.
- Assess Your Risk Tolerance: If the thought of covering a mortgage on an empty property or dealing with unexpected expenses causes stress, you might want to consider more manageable investments or house hacking.
Focus on Affordable Homes for Flipping
For those in the flipping business, sticking to smaller, more affordable homes is likely a safer strategy. The high interest rates are making larger homes less desirable, so targeting affordable properties could be a smart move. This also opens up opportunities in markets with a shortage of starter homes, which have been increasingly difficult to find, especially for first-time buyers.
Additionally, the impact of natural disasters, like the LA wildfires, may create new opportunities. With many people displaced, the demand for rental properties in the affected areas could surge, making these markets worth watching.
Final Thoughts
The year 2025 looks to be a time for consolidation and preparation, with 2026 holding more promise for buying, selling, or refinancing. While uncertainty remains—due to factors like the presidential election, inventory fluctuations, and potential labor shortages—playing it safe and focusing on strategic, well-informed investments will be key. Buyers and sellers alike will need to stay agile as they navigate a market full of unknowns.
In the previous post: “Is Now a Better Time to Invest in Real Estate Debt or Equity?“
Sellers Are Coming Back—Is the Lock-In Effect Finally Breaking?
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?“