Last Updated on February 14, 2025 by Bertrand Clarke

Adam Taggert – Thoughtful Money
Melody Wright

February 13, 2025

The U.S. housing market, long considered a bastion of stability, is showing signs of strain as experts warn of a potential downturn in home prices and an uptick in distress sales. After a year of mixed signals, including fluctuating mortgage rates and shifting buyer behavior, analysts are now forecasting a significant correction in the housing market, with some predicting a national decline in home prices of up to 9% by 2025.

The warning comes as December housing data revealed surprising trends, including a surge in transactions paired with weakening prices—a combination that has raised red flags for market watchers. According to Melody Wright, a housing market analyst and founder of M3 Melody Research, the data suggests a shift from motivated selling to distressed selling, particularly in markets that were previously considered immune to price declines.

“What we’re seeing is a transition from sellers who are optimistic about their ability to sell at high prices to those who are increasingly desperate,” Wright explained. “This is particularly evident in markets like Los Angeles, Richmond, and Washington, D.C., where inventory is piling up and prices are starting to soften.”

A Perfect Storm of Factors

Several factors are converging to create what Wright describes as a “perfect storm” for the housing market. First, the Federal Reserve’s decision to hold interest rates steady has left many potential buyers on the sidelines, unable to afford higher mortgage payments. At the same time, a wave of new construction and a surge in multifamily housing developments have flooded the market with inventory, further pressuring prices.

“We’re seeing an unprecedented amount of supply coming online,” Wright noted. “Builders have been aggressive, and now we’re also seeing a rise in short-term rental properties hitting the market as investors look to offload assets that are no longer profitable.”

Adding to the pressure is a demographic shift, as aging Baby Boomers begin to downsize or pass on their homes to heirs. Wright pointed out that many Boomers have held onto multiple properties, viewing real estate as a lucrative investment. However, as these properties enter the market, they could further exacerbate the inventory glut.

“The Boomer generation has been a significant driver of the housing market for decades, but as they age, we’re going to see a wave of properties coming onto the market,” Wright said. “This is going to create a long-term headwind for prices.”

Distress Selling on the Rise

One of the most concerning trends highlighted by Wright is the rise in distress selling. Delinquency rates on mortgages have been climbing, and foreclosure starts have increased significantly in recent months. According to data from Black Knight, foreclosure starts rose by 50% month-over-month in December, with year-over-year increases of 26%.

“What we’re seeing is a growing number of homeowners who are behind on their payments and trying to sell their homes before they fall into foreclosure,” Wright said. “This is a clear sign of financial stress, and it’s only going to get worse as rates remain high and economic uncertainty persists.”

Wright also noted that many homeowners who had been holding out for lower mortgage rates are now being forced to sell, as the anticipated rate cuts have failed to materialize. This has led to a surge in cancellations and a slowdown in transactions, particularly in markets that were previously red-hot.

The End of the Housing Shortage Narrative?

For years, the prevailing narrative in the housing market has been one of scarcity, with experts warning of a chronic shortage of homes to meet demand. However, recent studies are challenging this view. Research from the Cato Institute and Taylor & Francis suggests that the U.S. has actually built 3.3 million more homes than it has households, even accounting for population growth driven by immigration.

“The idea that we’re facing a housing shortage is simply not supported by the data,” Wright said. “In reality, we have more than enough housing to meet demand, and in some markets, we’re seeing a significant oversupply.”

This oversupply, combined with rising distress sales and demographic shifts, is likely to put further downward pressure on home prices in the coming years. Wright predicts that the correction will be most pronounced in 2025 and 2026, with some markets experiencing declines of up to 20%.

What’s Next for Buyers and Sellers?

For potential homebuyers, Wright advises caution. While there may be opportunities to find deals in certain markets, she warns against overextending financially, particularly in an environment of economic uncertainty.

“If you’re thinking about buying, make sure you’re in a stable financial position and plan to stay in the home for at least 10 years,” Wright said. “This is not the time to take on excessive risk.”

For sellers, Wright recommends listing sooner rather than later, as the market is likely to become increasingly competitive in the coming months. “If you’re planning to sell in the next year or two, now is the time to test the waters and see what kind of interest you can generate,” she said.

A Broader Economic Impact

The potential downturn in the housing market could have far-reaching implications for the broader economy. As home prices decline, the so-called “wealth effect” could reverse, leading to reduced consumer spending and slower economic growth. Additionally, municipalities that rely on property tax revenue could face significant budget shortfalls as home values fall and vacancy rates rise.

“This is not just a housing market issue—it’s an economic issue,” Wright said. “The ripple effects could be felt across the economy, from construction jobs to local government budgets.”

As the housing market enters a period of uncertainty, Wright’s message is clear: buckle up. “We’re in for a bumpy ride,” she said. “But for those who are patient and prepared, there will be opportunities on the other side.”

For now, all eyes are on the Federal Reserve and its next moves on interest rates. Any significant cuts could provide temporary relief, but with so many factors at play, the housing market’s trajectory remains uncertain. One thing is clear, however: the days of double-digit price appreciation are likely behind us.