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SEATTLE - As 2025 approaches, the U.S. housing market is poised for a shift.

On Monday, Zillow predicted a more active market with additional inventory for 2025, giving buyers more room to negotiate. However, homebuyers should expect some turbulence with fluctuating mortgage rates, even as more homes become available.

"Buying a home in 2024 was surprisingly competitive given how high the affordability hurdle became. More inventory should shake loose in 2025, giving buyers a bit more room to breathe," Skylar Olsen, Zillow’s chief economist, said in a statement.

More inventory in 2025, modest growth

Zillow said Americans can expect to see more sales and only modest home value growth in 2025 as the market slowly becomes unstuck.

Zillow forecasts a 2.6% home value growth in 2025 – a relatively slow pace that is similar to this year's growth.

A for sale sign is displayed outside of a home for sale on August 16, 2024 in Los Angeles, California. (Credit: PATRICK T. FALLON/AFP via Getty Images)

For existing home sales, Zillow forecasts 4.3 million in the coming year, up slightly from 4.1 million in 2023 and a projected 4 million in 2024.

"While affordability challenges will remain, buyers should expect more homes on the market, meaning more time to consider their options and more leverage in negotiations," Zillow explained.

Mortgage rates will be rollercoaster

According to Zillow, signs point to mortgage rates easing in 2025, but as revealed in 2024, mortgage rates rarely follow the expected path.

Zillow said it is more likely that buyers should expect plenty of ups and downs throughout the year.

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Mortgage rates fell in September, briefly bringing the share of affordable lists to a 19-month high. However, they have since climbed back to nearly 7%, changing the affordability picture for home buyers.

Zillow said more swings like this are expected next year with refinancing sprints occurring during the dips.

Buyers markets may spread to the Southwest

Zillow predicted that buyers markets will spread to the Sourthwest in 2024 as inventory continues to come unstuck in relatively affordable markets.

However, if mortgage rates fall more than expected, Zillow said that will dim the prospect that buyers markets will spread west, as this would increase competition and tilt negotiating power to the favor of sellers.

Americans embracing rentals, smaller homes

Americans are also shifting toward smaller homes and renting as a long-term lifestyle.

"Americans are adapting to sky-high costs by embracing coziness, a term that for so long has been a thinly veiled critique in real estate lingo," Olsen continued. "Many are also viewing renting as a longer-term lifestyle. A construction boom has eased pressure on rent prices, putting rent affordability on track to improve next year — that is, as long as wages continue to grow."

Zillow said the term "cozy" is appearing in more listing descriptions — 35% more in 2024 compared to 2023.

Meanwhile, rent growth has held steady at a reasonable pace, and the share of rental listings on Zillow offering a concession — such as free weeks of rent or free parking — is at a record high. Zillow said it expects that renters will not have as much opportunity to negotiate for that free month of rent by the end of next year.