Will the housing market crash in 2025? Market predictions

Is the housing market about to crash?

Economic instability breeds this question, especially for people who remember when the market really did crash back in 2008. 

In our ever-changing economy, no one can answer this question with certainty. But most economists agree a housing market crash in 2025 is not likely.

Will the housing market crash in 2025?

Inflation, interest rates, tariffs, Covid-related supply chain failures — uncertainty has defined our current decade so far. This uncertainty has also stoked fears about a housing market crash in 2025. 

Most predictions about the health of the housing market stem from the drastic increase in home prices in 2021 and 2022. 

Back then, in the wake of the Covid-19 pandemic, historically low mortgage rates ratcheted up home sales. In response, average home prices soared, increasing by more than $100,000 within two years.

This rapid increase in home prices stirred fears that home prices had risen too far too fast, creating a housing bubble that could pop anytime, reducing home equity for borrowers and putting their mortgages at risk.

What’s shaping the housing market?

In spite of these fears about a housing market crash, housing remains one of the most stable forces in the economy. 

How does real estate perform so well amidst the volatility of stocks, bonds, commodities, and other investments? How can real estate withstand the wide fluctuations in mortgage rates we’ve seen this decade?  

The answer, In a word, is demand. Nothing reflects the true value of a commodity better than the price a buyer pays for it. As long as homebuyers pay prices close to what home sellers are asking, current home purchase prices are not artificially high. 

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Why is demand so high?

Demand remains strong across the U.S. for several reasons:

— Low inventory: Builders still haven’t caught up from the housing market collapse of 2008. Back then there was almost no demand for for new homes, so builders stopped building, as this chart from the St. Louis Federal Reserve shows. 

— Higher building costs: Inflation has made building new homes more expensive over the past few years, increasing demand for existing homes while driving up home prices.

— Population trends: There are millions of more Americans in their 30s and early 40s today — people in their prime home buying years — than there were a generation ago.

— Pandemic fallout: Millions of people work from home now, making them more likely to shop for a new home that’s more suitable for work. Plus, divorce rates increased during the pandemic, creating more unmarried home buyers.

— Natural disasters: Wildfires, hurricanes, floods, and tornadoes have destroyed thousands of homes this decade alone, displacing homeowners and exacerbating the housing shortage in many communities.

— Low foreclosure rates: In 2024, the foreclosure rate on existing mortgages was about 0.23 percent. This means the vast majority of borrowers can afford their mortgages and aren’t eager to sell.

— Investor purchases: In 2024, housing investors bought about 16 percent of all homes for sale, reducing the supply of homes for people shopping for a primary residence.

Those low mortgage rates: Remember those below-3 percent interest rates back in 2022? Homeowners who locked in a mortgage rate like that don’t want to give it up by selling unnecessarily.

Multiple forces driving up demand keeps housing trends stable even when year over year numbers fluctuate. In fact, this steady demand makes housing a stabilizing force in the overall economy. 

What would a downturn mean for buyers, sellers, and renters?

The housing market collapse of 2008 helped push the global economy into the Great Recession. A housing market crash in 2025 would likely look different. In our current scenario, forces from outside the housing market — a rise in unemployment or inflation, for example — would lower demand for housing, lowering home prices.

This would affect buyers, sellers, and renters:

Impact on homebuyers: More affordability

Median home prices dropping rapidly helps homebuyers. In this scenario, buyers could afford more house — and they’d find themselves in position to negotiate for a better deal. After all, when yours is the only offer the seller has seen in months, the seller is more likely to consider a lower offer.

Plus, the federal funds rate tends to drop during economic slowdowns. A lower mortgage rate boosts affordability for buyers even more. There may not be a better time to enter homeownership. 

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Impact on sellers: Price drops could be dangerous

Hyper affordabiliy for buyers hurts sellers. In fact, falling home values can be devastating, especially when home prices drop below mortgage balances due. A home seller in this situation would need to come up with cash to finish paying off the mortgage on closing day. Or they’d need to pursue a short sale. 

Their best bet? If possible, don’t sell anytime soon. Hold onto the home and wait for home prices to bounce back first. Consider renting the home for extra income instead.

Outlook for renters: It could go either way

A housing market crash is a mixed bag for renters. A correction in home values should lower rental prices on new lease agreements, but existing lease agreements will remain in place until they expire.

It’s also hard to predict how landlords will respond to a downturn in home prices. Some may stop renting units or enter foreclosure on their properties that are heavily financed. Over time, these types of decisions can lower the supply for rental units which helps restore demand and stabilize rents.

How to prepare for a potential housing market crash

A housing market crash hardly seems imminent, but it’s always good to be ready in case home prices fall. Here’s how:

Keep an emergency fund

A housing market crash would likely be accompanied by higher unemployment, higher inflation, or both. Keeping an emergency fund helps homeowners weather these types of storms. 

Personal finance experts recommend saving at least three months worth of living expenses. Homeowners can use emergency funds to keep making house payments while they figure out how to respond to a job loss or other financial hardship.

Get a fixed-rate mortgage

30-year fixed-rate mortgages provide stability and predictability for borrowers. The loan’s mortgage rate, and its monthly principal and interest payment, won’t change until the balance is paid off, regardless of what happens with mortgage rates or other shifting economic variables. Plus, payments on 30-year loans are lower than on loans with 12- or 15-year terms. 

Better underwrites the full array of 30-year mortgage loans available to borrowers who want to buy or refinance a new home. Better also offers shorter loan terms for borrowers who can afford higher monthly payments.

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Make extra mortgage payments

Each mortgage payment lowers the loan’s balance, strengthening the borrower’s ability to keep the home during an emergency. In the earliest years of a 30-year loan, each monthly payment lowers the balance only gradually because most of each payment goes to interest. 

But, borrowers can lower their balances faster by paying extra money directly onto the loan’s principal — in addition to making the loan’s scheduled payments. Extra payments on principal build equity faster. Equity is the part of the home’s value that is paid off an no longer financed.

Keep equity in the home

Homeowners who have enough equity can use home equity loans and lines of credit (HELOCs) to borrow cash from their equity. But taking cash out of a home with these loans leaves the more vulnerable to price fluctuations in the market.

For example, leading up to the 2008 crash, many homeowners with lots of equity were taking out cash for new cars and vacations. It’s better to reinvest home equity cash into home improvement projects that increase the value of the home, or to consolidate high-interest debt to put them in a more favorable financial position.

Prepay home insurance and property taxes

Principal and interest make up only part of a monthly mortgage payment. Another large part of the payment goes toward annual homeowners insurance premiums and local property taxes. These expenses can vary a lot by location.

Using an income tax return, for example, to pay these annual fees upfront will lower the house payment, making it easier to pay during an emergency.

What to expect for the rest of the year

The housing market in the U.S. has an estimated value of $50 trillion. That’s almost twice as high as the national gross domestic product in 2024.

A real estate market this big and diverse changes slowly. That’s one reason housing supply levels still haven’t completely recovered from the 2008 crash. 

On the other hand, this is why housing is such a good investment. Even when home prices have fallen, as they did in 2008 and 2009, they have bounced back. Buyers who are willing to play the long game usually do relatively well. 

What about the short term housing outlook?

Homeownership is a long-term investment, but the short term matters too. Existing home sales have flattened the past few quarters as mortgage rates continue to hover between 6 and 7 percent. Still, the number of homebuyers exceeds the number homes for sale, nationally.

No economic forecast is foolproof, but as long as housing inventory lags behind demand, the housing market should remain relatively stable, and predictions about a housing market crash in 2025 or 2026 seem unfounded.  

Regardless of housing market predictions, home shoppers should shop within their budget, find a home that meets their present and future needs, and finance the purchase with a responsive mortgage lender like Better, one that uses tech and AI to cut time and overhead so they can pass the savings to you.

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