Pricing the Housing Market in 2025
I don't think interest rates have as much to do with housing prices as housing velocity. The real answer is always supply & demand.
The most common metric that folks default to when looking at the housing market is interest rates. While that’s doubtless an important factor, I have come to suspect that it has more to do with velocity rather than house prices specifically (as in, how fast homes move on the market, rather than how expensive they are).
I suspect pricing is actually a more simplistic calculation based on supply and demand, with a flavor of inflation rate. I’ll try to delineate my mental process on this.
First, you have to look at housing supply (units available, and units being built).
Second, you have to look at demand. How many people are in the market? One part of this is population growth (or decline). The answer to this also has to do with the health of the economy, wages, employment rate etc, but in reality I think the answer is always that everyone wants to live in a home.
And third, you do have to look at inflation. How much is the value of the dollar declining? Here’s how that affects pricing: the higher the inflation rate, the higher the nominal value of the house becomes. Regardless of how many dollars are printed, a house is still a house. It’s a store of real value.
So let’s take a look at supply.
There are currently 144.9 million housing units in the United States.
Approximately 1.68 million new housing units will be built in 2025.
The average occupancy rate is 95% (blending rentals and owned homes) which means that there are 137,655,000 occupied units.
Now let’s take a look at demand.
In 2024, there were 132.22 million households in the US.
In 2024, the US had a population growth of approximately 3,304,757. Since there is an average of 2.57 people per household in the US, this means a growth of approximately 1.3 million households.
Most of these were from immigration. Because of America’s low birth rate, only 518,638 people (201,804 households) are from native growth.
There have been some drastic changes in the past half-year that I want to look at, because they directly influence demand. Here are some stats from the Bureau of Labor Statistics:
Remittances to Mexico have dropped by 14% this year
In July, the amount of foreign-born workers dropped by 467K (the number of foreign-born workers has been dropping for four months in a row) while the amount of native-born workers increased by 383K.
Here’s why that’s relevant to the housing market: native-born workers were already here, by definition. And the foreign-born workers are leaving.
The question of inflation is always ugly. I’ll use the official BLS CPI rate (even though the real inflation rate is higher, I’m too emotionally exhausted to go into that). Here are the official CPI rates for the last ten years: 2024: 2.9%; 2023: 4.1%; 2022: 6.5%; 2021: 7.0%; 2020: 1.4%; 2019: 2.3%; 2018: 1.9%; 2017: 2.1%; 2016: 2.1%; 2015: 0.7%.
This comes out to an average of 3.1% per year.
My napkin math looks like this:
Relative housing supply can be interpreted as the surplus relative to the number of households, often expressed as a ratio or percentage.
Initial relative surplus = (5,435,000 / 132,220,000) × 100 ≈ 4.11%
New relative surplus = (6,913,196 / 132,421,804) × 100 ≈ 5.22%
Increase in relative housing supply = 5.22% - 4.11% = 1.11 percentage points
From what I can tell, there will be a 1.11% relative increase in the supply of homes during 2025. On the surface, this would mean we see a 1.11% decrease in housing prices.
However, if we also consider that homes serve as a flight to safety in the face of 3.1% inflation (and assuming that, theoretically, a house is still a house) we must take this currency devaluation into consideration.
A currency devaluation of 3.1% means that, nominally, the house is worth 3.1% more (while still being the same, yet older, house).
A 1.11% increase in supply, with a dollar worth 3.1% less, informs my prediction a nominal housing price increase of 1.99%.
Interestingly enough, this coincides with the actual 2% YoY increase in housing prices as reported by the Federal Reserve (worth noting that Redfin says 1.0% and Zillow says 0.5%).
Of course other factors (like the big one, interest rates) come into play. At this point, apparently no one on earth knows when interest rates will be adjusted except for Jerry Powell himself. However, whenever this happens, I suspect it will have a greater effect on housing velocity rather than housing prices.
And obviously, a huge 2008-2012 style economic recession would obviously eliminate jobs and crash the housing market simply because of mass defaults.
(Even that would be temporary. The houses still exist. What we’ve learned, if anything, over the past few years is that lack of income never really stopped Americans from buying things they can’t afford).
Some other notes:
Obviously regional differences exist. Migration between states is massive. Some metros are blighted, others are growing. You obviously cannot compare Detroit (which somehow still has a huge share of livable homes for <$30,000) with Boise (where the absolute cheapest house is currently listed for $304,900 on Zillow).
As a side, often you’ll see some argue for a focus on building affordable housing, essentially demonizing luxury condos or custom home builds. This is a logical mistake (not just because they are economically illiterate, but because for every more expensive door that is built, it opens a cheaper/older door elsewhere).
In short?
I don’t think real estate is crashing this year. Or next. Or even the next.