Are you looking to understand what will happen in this spring market? First, buyers have more options than have been available for some time. Here are three things to watch to understand the spring-selling market better.
Rental Market Impact
We often talk about for-sale and for-rent markets as if they were separate entities that didn’t influence each other. This is untrue.
“From mid-2020 to mid-2022, the discussion of a U.S. housing shortage was at an all-time high, and for-sale builders and for-rent developers scrambled to bring new supply online as fast as possible,” says Zonda chief economist Ali Wolf. “For builders, bringing new communities online in phases allowed them to adjust to demand in real time. For developers, however, the lag in construction timelines meant waiting years for completion, then releasing all units nearly at once.”
While demand for apartments is strong, the short-term influx of supply has increased consumer choice. This has resulted in rental rate compression in some markets (namely the Sunbelt) and a rise in concessions, which averaged 8.5% off overall rents nationally.
Kimberly Byrum, Zonda’s multifamily expert, notes that many developers report that few renters are moving out to buy a home. Instead, they are content to stay in their rental until home prices or interest rates drop.
Incentive Usage
Concessions are the name of the game in the rental market, but incentives are the new home market’s equivalent. An overwhelming majority of home builders are offering incentives to today’s prospective buyers. They are currently available at 57% of projects with to-be-built homes and 75% of projects with quick move-in supply. In parts of Florida and the Mountain West, incentives are available for 90% of projects.
Popular incentives such as closing cost assistance and mortgage rate buydowns have effectively addressed affordability challenges, helping sustain demand among price-sensitive buyers. This has been a key driver of the growing popularity of new homes among millennials. According to Zonda’s millennial survey, 25% of millennials who purchased a house last year opted for a new build—a significant jump from just 10% pre-pandemic.
For discretionary buyers, incentives can tip the scales in favor of a new home over resale, especially considering quality and design. But there are two problems.
- Incentives have lost their effectiveness. Incentives once drove urgency but are now so prevalent that they no longer motivate buyers to act quickly.
- Incentives are expensive. Initially envisioned as a temporary bridge until lower mortgage rates materialized, incentives have become a persistent cost, squeezing margins and adding unpredictability to the market.
While many builders’ sales are still meeting expectations, the cost of achieving those sales has become increasingly problematic. Given the competitive market and historically low affordability levels, we anticipate that incentives will remain critical in 2025.
The Sustainability of High-End Market Demand
Wealthier buyers have been more resilient and remained active despite rising mortgage rates and home prices.
Since interest rates rose in late 2022, the move-up and high-end markets have consistently outperformed the entry-level market. The National Association of Realtors’ consumer report for 2024 showed a pretty dramatic downshift in first-time buyers and an uptick in repeat buyers, many of whom are equity-rich due to years of home price appreciation.
As we enter 2025, the key question is whether this demand will hold. While many wealthy buyers are still active in the market, shifting economic conditions, evolving affordability dynamics, and changing buyer preferences could temper the high-end market’s momentum.
