The U.S. housing market is concluding a year marked by soaring prices, sluggish sales, and elevated mortgage rates. However, there are several factors that could potentially invigorate the market in the coming year. The Federal Reserve initiated a series of interest rate reductions in September, yet mortgage rates have paradoxically increased since that time. According to Freddie Mac, the average rate for a standard 30-year fixed mortgage climbed to 6.72% this week, up from 6.6% the previous week. Analysts predict that mortgage rates are likely to remain above the 6% threshold for the next two years.

The revitalization of the housing market may hinge on two key elements: sustained job growth and an increase in homeowners opting to sell their properties, thereby unlocking their low mortgage rates. "Employment and housing stock will be the driving forces behind home sales," remarked Lawrence Yun, the chief economist at the National Association of Realtors (NAR), in an analysis note following the Fed's third consecutive interest rate cut. Yun further explained in a press call that "the lock-in effect is weakening," which could lead to an increase in housing inventory, or the number of homes available on the market.

The health of the job market is invariably pivotal to the U.S. economy. A stable income enables consumers to make purchases, thereby stimulating economic growth. "Job losses or the apprehension of potential layoffs can lead to a downturn in home sales," stated a NAR release. "On the other hand, robust job creation can indicate a steady demand for home purchases, as prospective buyers gain confidence and the necessary equity to make a purchase."

Fortunately, the job market has remained robust, and concerns about its deterioration have eased in recent months. Federal Reserve officials anticipate that unemployment will remain at historically low levels next year, as per their latest economic projections. However, a robust job market can also have a downside. A study by the National Bureau of Economic Research indicated that a 1% rise in employment corresponds to an approximate 1.5% increase in home prices. The median price of an existing home reached $406,100 in November, marking the 17th consecutive month of annual price increases, as reported by NAR on Thursday.

A persistent shortage of available homes has been a long-standing challenge for the housing market. Freddie Mac estimated that there was a housing deficit of 3.7 million units in the third quarter of the previous month. However, total housing inventory increased for most of 2024, reaching 1.33 million units by the end of November, a 17.7% increase from the previous year. Yun expects that more homeowners, facing life changes such as new children, divorce, or marriage, will sell their homes next year, freeing up additional inventory and providing prospective buyers with more options.

An uptick in home construction can also enhance inventory, particularly in regions that support residential development. "Recent sales momentum, relatively lower costs, more abundant inventory in areas where builders can construct, and a growing number of younger households are common factors across markets in the South and West that are expected to experience significant home sales and price growth," Danielle Hale, chief economist at Realtor.com, stated in a note on Thursday.

However, the Federal Reserve has indicated that it is not the urgency to reduce borrowing costs may affect the construction speed nationwide. For 2025, the Federal Reserve's interest rate cut path will be slower, which will result in higher than expected building loan rates for builders and developers, and pose additional obstacles to the growth of housing supply, "Robert Dietz, Chief Economist of the National Association of Home Builders, wrote in a blog post on Wednesday.