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The U.S. housing market has been stuck in a weird state since the COVID-19 pandemic. In 2020 and 2021, mortgage lenders lowered their rates, which led to a surge in buyer demand. Since then, housing inventory hasn’t been able to keep up with demand. Because of that, home prices have remained elevated.

But now that the Federal Reserve has started to cut its benchmark interest rate, and it’s likely to continue on that path, home buyers could be in for serious relief in the new year. Here’s why.

A favorable chain of events

The Federal Reserve’s rate cuts won’t directly lower home prices in 2025. But they could spur a chain reaction that leads to a drop in home prices.

The Fed doesn’t set mortgage rates or any other consumer borrowing rate. But as the central bank continues to lower its federal funds rate, mortgage rates are likely to trend in that same direction. And that could have a positive impact on buyers.

As mortgage rates fall, more current homeowners may be willing to sell their properties, even if it means giving up the record-low rates they locked in during the days of the pandemic. And if housing inventory increases to a notable degree, it could narrow the current gap between supply and demand. Once that happens, home prices should start to fall, which would make securing a home more affordable.

In fact, housing inventory had already started to increase in September 2024. The National Association of Realtors recorded a 4.3-month supply of homes that month (which is the last month the group has data for).

It commonly takes a six-month supply of available homes to meet buyer demand in full and balance the housing market. But if the Fed’s rate cuts get us closer, it could lead to a serious drop in home prices come 2025.

How to get ready to buy a home in the new year

While there’s no guarantee that home prices will fall in 2025, there’s a good chance that’ll happen. So now’s a good time to position yourself to buy.

First, set a home-buying budget. Figure out what you can afford to spend on a home, keeping in mind that your housing costs should ideally be limited to 30% or less of your take-home pay. And those costs should include not just your monthly mortgage payments but also expected costs like property taxes and insurance.

Next, work on boosting your credit score. The higher it is, the more competitive a rate on a mortgage you might lock in. You can raise your credit score by paying bills on time, reducing credit card balances, and checking your credit report for errors.

Another way you can save money on a mortgage is by shopping around for options once you get closer to being ready to put a home loan in place. You can click here for a list of the best mortgage lenders today.

All told, there’s reason to be hopeful that homes will be less expensive to buy in 2025. We may not get there by the start of the year. But at some point, you may find that you’re looking at spending a lot less for a place to call your own.

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