As real estate appraisers, we are tasked with accurately reflecting the complex reality of the market. The interplay between macroeconomic conditions, housing demand, and inventory presents unique challenges and opportunities.
In January 2025, the economic indicators show a mixture of optimism and caution, while housing affordability issues persist. Understanding these dynamics is critical to delivering precise valuations that are relevant to buyers, lenders, and other stakeholders.
Economic Overview: Growth Amid Stability Measures
The U.S. economy ended 2024 on a high note, registering stronger-than-expected GDP growth despite a year marked by inflation concerns and fluctuating global markets. Employment figures remain robust, with low unemployment levels sustaining consumer spending.
Business investment has also rebounded, with sectors such as technology and construction contributing to the economic expansion.
However, the Federal Reserve’s decision to pause further rate changes signals caution. Policymakers aim to strike a balance between promoting economic growth and keeping inflation under control. For appraisers, this signals a period of relative financial stability, although market conditions can change quickly depending on inflationary pressures and future rate decisions.
The connection between the economy and housing cannot be overstated. A strong labor market typically supports housing demand, while interest rate fluctuations directly impact financing costs, making it vital for appraisers to stay informed on these trends.
Mortgage Rates: Affordability Under Pressure
One of the most significant headwinds facing the housing market today is persistently high mortgage rates. As of January 2025, the average 30-year fixed mortgage rate remains near 7%. This follows a year of steady rate increases driven by Federal Reserve tightening during 2023 and early 2024.
These elevated rates have had a cascading effect on housing affordability, making monthly payments significantly more expensive for borrowers. As a result, both demand and sales activity have slowed, particularly for existing homes. The National Association of Home Builders (NAHB) reported that 2024 saw the lowest number of existing-home sales since 1995, despite a modest uptick in December sales activity.
For appraisers, this environment calls for heightened sensitivity to affordability constraints. Reduced buyer purchasing power may limit appreciation potential, especially in markets where prices had escalated rapidly in prior years. This trend could also impact loan-to-value (LTV) ratios, which are critical to lenders assessing mortgage risk.
Inventory: Scarcity in Existing Homes Boosts New Construction
The inventory shortage in the existing-home market continues to be a dominant force shaping housing supply dynamics. Homeowners with lower fixed-rate mortgages are reluctant to sell and risk refinancing at a higher rate, contributing to historically low resale activity.
This limited inventory has created opportunities for homebuilders. In December 2024, new home sales rose by 3.6%, bringing the seasonally adjusted annual rate to 698,000 units. Additionally, the number of completed, ready-to-occupy homes has increased substantially—up 46% year-over-year—offering much-needed inventory in markets experiencing supply constraints.
For appraisers, this divide between new and existing inventory requires careful analysis. Properties in new developments may command premiums due to modern amenities, energy efficiency, and lower maintenance costs, but appraisers must also consider competitive pressures from older homes nearby.
When selecting comparables, it is important to differentiate between homes that reflect these distinct characteristics.
Pending Home Sales: Signs of Stabilization
Pending home sales—a leading indicator of future market activity—showed modest gains in December 2024. While this suggests some stabilization in the market, buyer sentiment remains cautious due to high financing costs and economic uncertainty.
Appraisers should closely monitor pending sales data, which can provide early insights into shifts in local markets. Understanding how contract signings translate into closed transactions is crucial for accurately predicting near-term trends in pricing and demand.
Regional Variations and Local Market Nuances
While national trends offer a broad overview, housing markets are inherently local. Regional variations in job growth, population migration, and development activity can significantly affect property values.
For instance, Sunbelt states continue to attract relocations due to their favorable business environments and climate, which has kept demand relatively strong despite higher mortgage rates. Meanwhile, markets with slower economic growth may experience a more pronounced decline in both sales and prices.
For appraisers, it is essential to account for these regional differences. A strong local job market, for example, may offset some of the affordability challenges created by high interest rates. Conversely, areas facing population declines or reduced employment opportunities may see greater downward pressure on prices.
Appraiser Best Practices for 2025
Given the evolving market landscape, here are key recommendations for appraisers to enhance their valuation processes:
- Regularly Update Market Data: Staying informed on the latest economic reports, mortgage trends, and inventory levels will ensure that appraisals reflect current conditions rather than outdated assumptions.
- Understand Financing Conditions: Elevated mortgage rates are reshaping buyer behavior. Appraisers should consider how financing terms impact demand and incorporate this understanding into their valuation models.
- Analyze Comparable Properties with Care: In a market where new home sales are rising and existing inventory is scarce, selecting relevant comparables is more complex. Adjustments for age, condition, and amenities are critical to ensuring accurate valuations.
- Consider Regional Dynamics: National trends may not apply uniformly across all markets. Local data on employment, population growth, and new construction should guide appraisers’ assessments of market health.
- Maintain Communication with Stakeholders: Lenders, real estate agents, and clients rely on appraisers for insights into market trends. Providing well-supported valuations that account for current conditions will strengthen your reputation and credibility.
Conclusion
The housing market in early 2025 presents a mix of challenges and opportunities for real estate appraisers. High mortgage rates, limited inventory, and regional variations require a careful and data-driven approach to property valuation. By staying informed and adaptable, appraisers can provide accurate, reliable, and actionable insights to support the needs of buyers, sellers, and lenders in this dynamic environment.
McKissock’s appraisal continuing education courses are a great way to stay informed and up-to-date on all your CE requirements.
Thank you for reading The Full Measure! Stay sharp, stay informed, and continue leading the way in real estate appraisal. See you next month!
