Zillow Paints Rosy Picture for What’s to Come in the Housing Market

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After the roller-coaster ride of the last few years, listings and data analytics site Zillow have painted a generally optimistic outlook for residential real estate in 2025, with more inventory and higher wages increasing affordability and purchasing/rental power.

However, before you explode into a flash mob song-and-dance routine in the street, that old financial phantom of higher interest rates could appear from the shadows and rain on everyone’s parade. If you know what to do, though, there are workarounds for investors that could keep you in good stead—regardless of those pesky rates. 

Take Advantage of Increased Housing Activity

If you’re looking for 2025 to be the year you make a fortune in equity, you might be in for a rude awakening. Next year will probably be a year for recovery rather than zooming into the stratosphere with price increases. 

Zillow’s 2.6% home value growth prediction for 2025 is modest and not too dissimilar to this year’s, which is a good thing, as it means more people can get into the housing market or afford rent. Thus, flippers will have more buyers, and landlords will have more tenants, as long as investors remain realistic about profits and rents. Zillow estimates 4.3 million home sales in the coming year, up marginally from 4.1 million in 2023 and a projected 4 million in 2024.

The Southwest Will Become a Buyer’s Market

After the post-pandemic pandemonium of inventory deserts and bidding wars, Zillow’s data shows that more areas are becoming buyer’s markets. That trend is set to continue in 2025, as the hot spots spread from the Southeast (Florida and Texas) to the Southwest (Arizona, Nevada, Texas, and New Mexico) and inventory loosens up with an increase in new construction. 

However, all bets are off if mortgage rates fall more than expected, and the increase in buyers will also increase competition and favor sellers, with prices continuing to increase.

The Mortgage Rate Roller Coaster

If we’ve learned anything over the past few years, it’s that predicting mortgage rates is like predicting political elections—anything can happen, upending the best-made plans. So far, the Federal Reserve’s lowering of interest rates has done little to actually lower mortgage rates.

Zillow courageously predicts more interest rate uncertainty. It’s not surprising that the listing giant refuses to go out on a limb. Given the political and economic uncertainty that lies ahead, even the best data analysts are finding that their crystal balls aren’t working. 

Investors should pay close attention to the rates, and amid the dips—which there surely will be—they should clamor to buy or refinance.

Small Homes Are Big Business

Americans are embracing a harsh lesson: Bigger is not always better. The affordability crisis has made craving for McMansions a thing of the past. Sustainability and affordability are the new buzzwords in housing.

Zillow predicts that American homebuyers’ embracing of smaller houses—signified by the word “cozy” in more listings, up 35% in 2024 over 2023—will continue. 

That means flippers who buy smaller homes will spend less on renovation, and landlords looking to invest in small multifamilies could find a large pool of applicants. For rookie investors, house hacking in small multifamilies has always been a proven way to take advantage of FHA owner-occupied financing while allowing tenants to pay the mortgage. 

As Rentals Fill, Tenants Will Have Less Room to Negotiate

Over the last two years, the construction boom resulted in a surplus of apartments in the Sunbelt, with landlords offering concessions such as a month’s free rent to fill them. Zillow predicts that as apartments are filled, these concessions will end. 

Many of these new rental communities charge premium rents and include amenities such as gyms, swimming pools, media rooms, lounges, and meeting and working spaces. Not all prospective tenants want or can afford these. Thus, there is a gap in the market for less expensive rentals without amenities. Landlords who can offer this but still supply quality apartments with newer finishes will be in demand. 

Pet-Friendly is the New Norm

Nowadays, 58% of renters now have pets—up from 46% before the pandemic. That’s partly because renting is currently more affordable than buying. 

With the median age of a renter now 42, many tenants are becoming forever renters—eschewing homeownership, the interest-heavy front end of a mortgage for renting, and embracing the freedom it allows to move at short notice, Fido in tow. What’s clear is that with many tenants deciding to rent long-term, they are no longer putting off things like owning a pet until they buy a home.

Thus, landlords must pet-proof their buildings to ensure that smells and damage from animals can be easily handled. That means removing carpet and installing vinyl plank flooring, enabling areas for dog walking outside larger apartment complexes, ensuring tenants get pet insurance, and updating lease agreements to cover pets of certain sizes in their buildings.

Final Thoughts

Successful landlords must be nimble and learn to navigate gaps in the market of larger corporate rentals. Investors should avoid being over-leveraged and not take on adjustable-rate financing that is vulnerable to the vagaries of the economy. Accruing smaller multifamily units for all cash or with a high down payment will allow landlords to keep building wealth, enjoying tax advantages, and saving while waiting to see how the market moves. 

As we look to 2025, there are simply too many unknowns to take too many risks. The Trump-proposed tariffs, the possibility of a soaring economy, and higher inflation and, thus, higher rates are not helpful when borrowing or undertaking a lot of construction.  

Despite the risks, it’s good to stay in the game. As Zillow predicts, real estate should continue to ascend in 2025. However, should the music suddenly stop, you don’t want to find yourself without a chair to sit on.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.