Existing Home Sales Hit a Multidecade Low. Why Are Economists Upbeat About the Housing Market?

Existing home sales in the United States have reached a multidecade low, with only 3.9 million sales recorded in 2022, the lowest level since 2010. Despite this grim statistic, economists remain optimistic about the housing market's future. This article explores the reasons behind their bullish outlook and the factors contributing to the current sales slump.

Mortgage Rates and Housing Affordability

One of the primary factors driving the recent sales slump is the rapid increase in mortgage rates. In 2022, the average 30-year fixed-rate mortgage rate rose from 3.1% in January to 6.5% in December, more than doubling in just one year. This significant increase has made home purchases less affordable for many buyers, leading to a decrease in demand and a slowdown in home sales.



However, economists expect mortgage rates to ease in 2025, making homes more affordable and stimulating demand. Zillow's chief economist, Skylar Olsen, predicts that mortgage rates will be lower by the end of 2025 than they will be at the start of the year (Zillow, 2024). This expected decline in mortgage rates could help to boost home sales and improve affordability for buyers.

Housing Supply and Inventory

Another crucial factor influencing the housing market's trajectory is the supply of homes available for sale. In recent years, the supply of new and existing homes has been low, leading to a seller's market and driving up home prices. However, economists expect more inventory to shake loose in 2025, giving buyers more options and easing affordability concerns.

Zillow forecasts that 4.3 million existing homes will be sold in 2025, up slightly from the projected 4 million in 2024 (Zillow, 2024). This increase in sales is expected to be driven by a combination of factors, including improved affordability due to lower mortgage rates, increased housing supply, and positive economic indicators such as job growth and population growth.

Demographic Shifts and Housing Demand

Demographic shifts, such as population growth and household formation, play a significant role in shaping the housing market's future. These factors influence demand for housing and can impact affordability, prices, and sales. Economists incorporate these factors into their positive forecasts to account for changes in the housing market's fundamentals.

For instance, in Canada and Australia, immigration and population growth have rebounded strongly, contributing to the recovery in housing demand (Goldman Sachs Research, 2024). Similarly, in the United States, the three Ds (death, divorce, and debt) and other life changes, such as job changes and the need for more space, drive housing demand (NAR, 2024).

Economic Indicators and Job Growth

Despite the recent sales slump, economists remain bullish due to positive economic indicators. For example, job growth is expected to continue, with nearly 2 million jobs projected for 2025 and another nearly 2 million increase in 2026 (NAR, 2024). Additionally, the U.S. population has grown by 70 million since 1995, signaling pent-up demand for housing (NAR, 2024). These factors, combined with the expected easing of mortgage rates and increased housing supply, contribute to a more optimistic outlook for the housing market in 2025.

In conclusion, while existing home sales have reached a multidecade low, economists remain upbeat about the housing market's future. The expected decline in mortgage rates, increased housing supply, and positive economic indicators, such as job growth and population growth, contribute to a more favorable environment for home buyers and sellers in 2025. However, it is essential to remain cautious and monitor the market's developments, as risks and challenges may still arise.