2025 Outlook Series | U.S. Existing Home Sales Hit 14-Year Low: Could the Housing Market Collapse? | Blog

2025 Economic Outlook Series: As the year-end approaches, we’re once again publishing a series of outlook articles for 2025 to provide subscribers with in-depth analyses on major economies and key issues for the upcoming here. This time, besides focusing on key economies like the U.S. and China, we’ll also share insights on real estate cycles, AI productivity ,supply chain dynamics, and shifts in international order. Enjoy the first article and click here to follow the series.

Since the rate hikes began in 2022, the U.S. housing market has been dampened noticeably, with persistently sluggish housing starts and home sales. The latest data on building permits and new housing starts remains subdued, and existing home sales have reported year-over-year declines for 3 consecutive years, with September’s figures reaching a 14-year low.

Now that the Fed rate-cutting cycle has finally begun, can lower interest rates stimulate the housing market and bolster economic growth? Where are we at in terms of the real estate cycle? Could the housing market rally extend into 2025? In the first part of this article, we look at housing demand and borrowers' financial health in the context of the current rate cut cycle, and in the second part, we assess the possibility of a housing bubble in the longer run.

I. Borrowers’ Finances in Good Shape, Rate Cuts Likely to Stimulate Demand

To start with housing demand outlook, as home purchases rely heavily on mortgages, we anticipate easing lending standards from rate cuts to improve mortgage availability and stimulate recovery in demand. As the historical data in the chart below shows, sales of both existing homes and new homes typically see an upward momentum during periods of declining mortgage rates.

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Furthermore, the net percentage of banks tightening mortgage lending standards has been steadily declining since its peak in mid-2023 when the Fed stopped hiking rates, indicating continued easing of credit conditions, which may loosen further as interest rates continue to decline. With improved lending conditions, loan demand has also shown signs of recovery. Should credit terms continue to ease, loan demand is expected to return to growth, with net demand potentially returning above zero.

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Default Rates Remain Low Despite High Interest Rates, Delinquency Rates at Historic Lows

Contrary to what people may expect, high interest rates have not led to a surge in mortgage delinquencies. As a matter of fact, mortgage delinquency rates remain at historic lows, unlike rising delinquencies in auto and credit card loans. This is mainly because over 90% of mortgages in the U.S. over the past decade are fixed-rate loans, meaning the rates are locked in and thus limiting borrowers’ exposure to rising interest rates.

Additionally, data from the New York Fed shows that most mortgages are held by borrowers with high credit scores, with the median credit score remaining above 750, indicating a very low share of subprime mortgages and overall healthy financial profiles. Even though there is a slight increase in the percentage of loans transitioning into early delinquency, it’s merely a return to pre-pandemic levels and does not pose a risk of widespread defaults.

In summary, housing demand is expected to rebound with easing interest rates and lending standards. Meanwhile, the financial profiles of mortgage borrowers remain relatively solid, dominated by people with prime credit scores. If lending conditions continue to relax as expected, credit availability may expand to borrowers with lower credit scores, further fueling demand. Increased housing demand will also boost other housing-related expenditures, providing support for consumer spending.

Besides boosting demand in the housing market, lower interest rates also incentivize builders to increase supply, supporting construction-related investments. Together, housing investment and related consumer spending account for around 7~10% of U.S. GDP, underscoring the sector’s economic significance. This is why we believe the housing market will be a crucial factor in determining whether the U.S. economy can achieve a soft landing in the coming year. At that point, we’ll need to monitor whether a housing bubble is forming alongside sky-high home prices. We delve into that in the section below.

II. Do Record-High Home Prices Spell Bubble Risk? No Concerns for Now

First, we can assess the risk of a housing bubble by examining housing vacancy rates and inventory levels. Looking back at the 2000s, rising vacancy rates as well as rapidly growing inventories of new and existing homes indicated oversupply, eventually leading to the 2008 housing market carsh. In contrast, since the crash, homeowner and rental vacancy rates in the U.S. have continued to decline, signaling continued undersupply. Moreover, existing home inventory, which makes up over 70% of housing inventories, remains at low levels.

Although new home inventory is approaching the peak seen in 2006, we believe there is no risk of excess housing supply for now. Next, let's take a closer look at housing supply and long-term demographics to understand why the housing market bull run is likely to continue.

Low Risk of Oversupply: New Home Inventory Pressure to Remain Contained Over the Coming Year, Existing Home Inventory Also Suppressed Due to Lock-in Effect

In terms of new home inventory, historically, it typically takes around a year for newly started homes to become market-ready inventory, and with housing starts declining since 2022, gains in new home inventory is expected to be limited in the coming year. Coupled with rate cut anticipation stimulating housing demand, new home inventory may stop increasing or even decline.

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