Investing.com — The U.S. housing market is expected to show mild improvements in 2025, but higher mortgage rates and affordability issues will continue to dampen activity, according to a report from Bank of America.
Mortgage rates, which had fallen from last year’s peak of 8% to around 6% earlier this year, have recently risen to almost 7%. BofA analysts expect interest rates to remain between 6 and 6.5% through 2025, limiting opportunities for potential buyers and perpetuating the “lock-in effect” as low-interest homeowners are reluctant to to sell.
Affordability remains an important point of attention. Despite some improvement since 2022, affordability is still at its lowest level since 1985, with average house prices around four times the median income. In October, the average price of a single-family home in the US was $412,000, while the average income was $102,000.
The report notes that supply has improved, construction bottlenecks have decreased and more projects have reached completion. However, existing housing inventories remain historically low and builders are constrained by high interest rates and costs.
On the upside, resilient housing demand and gradual wage growth could support the market. BofA predicts existing home sales will rise to about 4.2 million by 2025, assuming mortgage rates stabilize. The ratio of mortgage payments to rent has also fallen, indicating improved conditions in some regions, although rents remain cheaper in 82 of 97 major U.S. cities.
In the long term, affordability is expected to slowly return to early 2000s levels as interest rates stabilize and wages outpace inflation. Still, BofA warns that the road to recovery will be gradual, with high mortgage rates posing a persistent headwind for both buyers and sellers.
