Housing Demand Often Sinks After a Market Correction. The Busy Season Could Suffer.

The housing market is a dynamic beast, and it's no stranger to the ebbs and flows of economic cycles. As we look ahead to 2025, the question on everyone's mind is: will the busy season for housing be as bustling as in years past, or will it suffer from the aftershocks of a market correction? Let's dive into the data and see what the future might hold.



Historical market corrections have a significant impact on housing demand, often leading to a decline in demand post-correction. One of the key factors contributing to this decline is the change in consumer confidence. For instance, during the 2008 financial crisis, interest rates were cut to 0.5%, but demand for housing remained low. This was because "other factors were reducing demand for housing – like the recession and prospect of rising unemployment." This shows that economic uncertainty and the fear of job loss can deter potential buyers from entering the market.

Another factor is the availability of mortgages. During the 2008 credit crisis, there was a "sharp rise in the cost of interbank lending and a fall in availability of mortgage finance." Many mortgage products were withdrawn, making it more difficult for would-be homeowners to get on the property ladder. This reduction in mortgage availability directly impacts housing demand, as fewer people are able to secure the financing needed to purchase a home.

Additionally, the cost of renting can influence housing demand. Despite the financial crisis and housing ‘crash’, there was a "30% increase in the cost of renting between 2005 and 2021." High rental costs can encourage households to try and buy a house, as buying a house through a mortgage becomes relatively cheaper. However, if rental costs remain high and mortgage rates are elevated, as they are expected to be in 2025, this can deter potential buyers from entering the market.

Lastly, the impact of interest rates on housing demand cannot be overstated. When interest rates reached 15% in 1992, demand for housing collapsed, causing a large fall in demand for housing. This is because mortgage payments take a high percentage of people’s personal disposable income, and even small changes in interest rates can deter people from buying. In 2025, mortgage rates are expected to hover around 6-7%, which, while higher than pre-pandemic lows, is projected to stabilize, providing more predictability for buyers and homeowners. However, this elevated rate could still limit refinancing activity and cool rapid price growth, further impacting housing demand.

To predict the impact of a market correction on the housing market's busy season, investors should monitor several key indicators:

1. Mortgage Rates: Mortgage rates are a critical factor in determining the affordability of homes. As of early December 2024, the average 30-year mortgage rate was 6.84 percent, which is an improvement from the peaks seen in 2024 but still relatively high. Investors should keep an eye on mortgage rates, as even small changes can significantly impact the size of mortgage payments and, consequently, the demand for housing.

2. Inflation and Economic Indicators: Inflation rates and economic indicators such as unemployment and income growth play a crucial role in shaping the housing market. The U.S. inflation rate as of October 2024 was 2.6 percent, edging closer to the Fed’s stated goal of 2 percent. Investors should monitor these indicators, as they can influence the Federal Reserve's monetary policies and, in turn, mortgage rates.

3. Housing Inventory: The supply of available homes is another key indicator. As of October 2024, the nation had a 4.2-month supply of housing inventory, up from 3.6 months one year ago. This increase gives buyers more flexibility, but many areas are still in a seller’s market. Investors should track inventory levels, as a sudden increase in supply could lead to a market correction, while a decrease could indicate continued high demand.

4. Home Prices and Sales: The median home-sale price in the U.S. as of October 2024 was $407,200, a year-over-year increase of 4.0 percent and the highest October median NAR has ever recorded. Investors should monitor home prices and sales data, as rapid price increases or decreases can signal a market correction.

5. Consumer Confidence: Consumer confidence in the housing market and the broader economy can influence demand for homes. If consumers are optimistic about the future, they are more likely to buy homes, even during a market correction. Investors should monitor consumer confidence indices, such as the Fannie Mae Home Purchase Sentiment Index, which rose again in November 2024 to its highest level since February 2022.

By monitoring these key indicators, investors can better predict the impact of a market correction on the housing market's busy season and make more informed investment decisions.