Inventory shortage affects price growth
The final quarter of 2024 saw single-family home prices rising by 5.8% year-over-year, signaling a recovery from earlier slowdowns.
This increase follows a revised 5.4% growth rate recorded in the previous quarter, according to Fannie Mae’s latest Home Price Index (FNM-HPI).
Despite the acceleration, the housing market continues to face challenges from limited inventory and higher mortgage rates.
On a quarterly basis, the national price increase was more modest, with a seasonally adjusted 1.7% rise in Q4 2024, up from the 1.2% growth seen in the third quarter. Non-seasonally adjusted figures showed a slight 0.3% increase in prices.
According to Fannie Mae's senior vice president and chief economist, Mark Palim, the acceleration in year-over-year price growth can be attributed to several factors, particularly the ongoing inventory shortage.
“Inventories of existing homes for sale have improved from a year ago but remain historically low, due largely to the so-called lock-in effect," said Palim.
Since October, mortgage rates have climbed back from a low of around 6.1%, edging closer to 7%. Palim explained that these higher rates are exacerbating affordability issues, while also discouraging homeowners from selling.
"The higher mortgage rate environment is not only hurting affordability, but it’s also exacerbating the lock-in effect by further reducing homeowners’ incentive to move,” Palim added.
Looking ahead to 2025, Palim suggested that the housing market will face a complex balancing act. A notable decline in mortgage rates could be needed to alleviate the lock-in effect and increase the supply of homes.
"However, we believe such a decline would likely jumpstart demand from potential first-time homebuyers currently waiting to purchase, which could lead demand to outpace any improvement in supply, further exacerbating already-high home prices and purchase affordability,” said Palim.
What do you think will happen to home prices in 2025? Will mortgage rates or supply issues play a larger role in shaping the market? Let us know your thoughts in the comments.
