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Homebuyers in 2025 are navigating a very different world from just a few years ago. Back when mortgage rates hovered around 3%, many could stretch for dream homes or outbid the competition. But with rates now more than double that, affordability has taken a hit—and buyers are making new kinds of choices. From downsizing plans to relocating to cheaper cities, today’s buyers are recalculating what’s possible. Sellers, too, are feeling the shift, often holding off on listing rather than giving up their low-rate loans. The result? A market in flux, shaped as much by psychology as by math.

The Shifting Housing Landscape: 2019/2021 vs 2025

The Era of Low Rates (2019-2021)

Before 2022, interest rates were low and buyer activity was high. In 2019, mortgage rates were under 4%, and in 2021 they hit record lows below 3%. Cheap loans meant more buyers rushed into the market, often engaging in fierce bidding wars. Home sales hit a 15-year high in 2021, with over 6 million existing homes sold nationwide. Houses would frequently sell within days, often above the asking price, as eager buyers took advantage of easy financing.

Today’s Reality (2025)

By 2025, the landscape looks very different. Mortgage rates have been hovering around 6% to 7% – roughly double what they were in 2021. With loans so much more expensive, far fewer people are buying homes. In 2023, existing-home sales fell to about 4 million, the lowest in over a decade, as many would-be buyers were priced out.

Instead of frantic bidding wars, buyers today are more cautious and price-sensitive. Homes tend to stay on the market longer, and sellers can no longer count on multiple offers within a weekend. The jump in interest rates has cooled the once-sizzling housing market, leading to slower sales and more negotiating between buyers and sellers.

First-Time Homebuyers Face New Challenges

High interest rates have hit first-time homebuyers especially hard. These buyers, often younger people in their 20s or 30s, typically have limited savings and smaller incomes, so a costly mortgage can be a big obstacle.

During the 2021 boom, low rates helped many first-timers afford homes. In 2022, however, the combination of rising rates and surging prices pushed many newcomers out of the market. First-time buyers made up only 26% of home purchases in 2022, a steep drop from 34% the year before. This was the lowest first-time buyer share in decades.

There are signs of a rebound, though. As the market cooled in 2023, first-time buyers slowly regained some ground. By 2024, first-timers were about 32% of buyers, up from the prior year’s low. This happened partly because higher rates caused some repeat buyers to stay put, which meant a larger portion of the homes sold went to people entering the market for the first time.

Adapting to High Rates

Today’s first-time buyers must overcome serious challenges. With mortgage rates around 7%, a modest starter home comes with a hefty monthly payment. Many young buyers are responding by:

Shopping for smaller homes
Looking in cheaper areas
Tapping family for larger down payments
Considering fixer-uppers or condos as entry points
Delaying other life plans to save money

Surveys show a strong desire for homeownership among Gen Z and millennials, but patience is key. In one recent survey, 67% of Gen Z respondents said they plan to buy a home by 2025, a higher share than any other age group.

Cash Is King: The Rise of All-Cash Purchases

One notable trend in the high-rate environment is the surge in all-cash home purchases. When borrowing gets expensive, buyers who can pay cash gain a big advantage.

Before the pandemic, cash buyers typically made up about a quarter of home sales in a given year. But that share has grown. In 2023, around one-third of U.S. home purchases were made entirely with cash, one of the highest rates in a decade. Cash purchases jumped partly because interest rates spiked – buyers who don’t need a loan suddenly have more negotiating power.

Even in 2024, as the market cooled further, cash deals remained elevated. About 32.6% of home sales in 2024 were cash (versus 35.1% in 2023) – a bit lower than the year before, but still above pre-pandemic norms.

Who Are These Cash Buyers?

A sizable number are retirees or older homeowners trading down to cheaper properties. Baby boomers in particular have been very active in the market. After years of owning homes, many boomers have accumulated significant equity or savings. This allows them to buy their next house outright with proceeds from their last one.

New data show baby boomers (ages ~60-78) now make up the largest share of home buyers at 42%, and about half of older boomers buy their homes entirely with cash.

Real estate investors are another big group of cash buyers. Small companies, individuals who flip homes, and large institutional investors often prefer cash. During the pandemic housing boom, investors borrowed cheaply and bought in big numbers. Now, with loans costly and housing cool, investor activity has pulled back.

The Mortgage Dilemma: Adjustable vs. Fixed-Rate Loans

For buyers who do take out loans, the type of mortgage they choose is shifting. The vast majority of Americans have historically preferred 30-year fixed-rate mortgages – loans that lock in one interest rate for the entire term.

When rates were low, almost everyone went with a fixed loan for stability. But as rates rose, adjustable-rate mortgages (ARMs) have made a comeback for a subset of buyers looking to save money. An ARM typically offers a lower introductory rate for the first 5, 7, or 10 years, after which the rate can adjust up or down.

Data shows a clear uptick in ARM usage:

In early 2021, ARMs accounted for only around 3-5% of mortgage applications
By October 2023, around 9% of all new mortgage applications were for ARMs
Measured by dollar volume, ARMs made up nearly 19% of mortgage dollars in April 2023, up from just 4% in 2021

Why the shift? Simply put, adjustable loans offer a lower rate up front. For example, a 5/1 ARM might start at an interest rate half a percentage point or more below a 30-year fixed. In late 2023, one popular ARM had an average rate of 6.3% while the 30-year fixed was around 7.7%.

Many younger, higher-income buyers have been among those embracing ARMs to afford the homes they want. It’s important to note, though, that adjustable mortgages carry risk if rates don’t come down.

Shifting Geography: Where People Are Buying

Rising interest rates have also influenced where people buy homes, though this trend intertwines with pandemic-era shifts. In the late 2010s, many buyers were already showing a preference for suburbs and smaller cities, seeking more space or affordable prices.

The pandemic in 2020-2021 supercharged this pattern, as remote work allowed urban dwellers to move to suburban or even rural areas. The median distance buyers moved hit a record 50 miles in 2022, up from the usual 10–15 miles in prior years.

Now in 2025, interest rates are contributing to a continued focus on affordability, which often means looking outside expensive urban cores. With mortgages costly, buyers get more bang for their buck in suburbs or smaller towns. Recent data indicates that suburban home values have kept rising slightly faster than urban home values as demand remains strong in outlying areas.

The Urban Revival

That said, city living is not dead. Some reports show that major metro areas are regaining population after the worst of the pandemic. The Census Bureau found metro counties grew about 1.1% from 2023 to 2024, a faster clip than the previous year.

Young professionals in particular may be moving back to urban job centers as offices reopen. However, many of these returnees are choosing to rent in the city rather than buy, given high purchase costs. High interest rates discourage urban purchases in places where prices were already steep.

Another factor is the “lock-in” effect for existing homeowners. Homeowners who bought or refinanced when rates were 3% have a powerful incentive to stay put, rather than move and face a 7% rate on a new loan. This has led to an unusually low number of homes for sale in 2025.

The Rent vs. Buy Equation

One of the clearest behavioral shifts in this high-rate environment is that more Americans are choosing to rent instead of buy. When interest rates shot up, the cost advantage of owning shrank or even reversed in many areas.

Data from Realtor.com illustrates this trend well. As of early 2025, renting the typical apartment or house is a better bargain than purchasing a starter home in 48 out of the 50 largest U.S. metro areas. On average across the country:

A renter pays about $1,700 per month for a median apartment
A new homeowner buying a median-priced starter home would pay over $2,200 per month
That’s a difference of roughly $500+ extra per month to own in many markets

In mid-2024, the gap was even larger – renters were saving over $1,000 a month compared to buyers in some cities. This is a dramatic flip from the situation a few years ago, when rock-bottom rates made monthly buying costs quite low.

The reason is straightforward: higher interest rates have inflated monthly mortgage payments. Even though rents have also risen in recent years, rent growth has cooled while borrowing costs remain high. The Realtor.com January 2025 report showed national median rent actually edged down 0.2% year-over-year.

Real Estate Investors Pull Back

Real estate investors – those buying properties not to live in but to flip or rent out – were extremely active during the 2020-2021 housing boom. However, the tide has turned with higher interest rates. Many investors have pulled back, resulting in fewer investor-driven sales in 2023 and 2024.

By mid-2023, the number of homes being bought by investors had dropped sharply:

Investors bought 45% fewer homes than they did a year earlier – the largest annual decline in investor activity since 2008
Investor market share hit an all-time high of around 20% in early 2022, then dipped to roughly 16% by late 2023

Several factors explain why rising interest rates cooled investor appetite:

High rates mean higher costs of borrowing for those investors who use loans
Annual home-price growth has slowed way down, making flipping riskier
Rent growth has moderated while expenses like mortgage payments are up, squeezing profit margins

However, not all investor behavior is uniform. Some investors are still active, but they’ve changed strategies. Many are now targeting lower-priced homes where they see better potential rental yields or easier resale. The share of investor purchases that were inexpensive homes (starter homes) hit a record high, as investors sought bargains.

New Homes Gain Market Share

Another shift in homebuyer behavior involves what kind of homes people are buying – new construction vs. existing homes. Traditionally, the vast majority of home sales are existing homes. But with the interest rate spike, existing homeowners grew reluctant to sell (due to being “locked in” to low rates), leading to a shortage of resale listings.

In response, homebuilders seized the opportunity and ramped up efforts to sell new houses, sometimes with special incentives. As a result, newly built homes now make up a bigger portion of homes on the market than they have in years.

In 2023, while sales of existing homes were dropping, sales of new single-family homes actually rose about 4% compared to the year before. Builders began offering discounts and mortgage rate buy-downs to entice buyers. By late 2023, incentives from builders reached record levels. One major builder, Lennar, was giving concessions equal to 13% of the home’s price on average in early 2025.

The strategy worked to a degree: new home sales in 2024 remained relatively strong, and new homes took a larger market share. As of late 2024, about one in three homes available for sale was a new construction, a much higher ratio than normal.

Generational Divides in Homebuying

Rising interest rates have affected all age groups, but different generations feel the effects in different ways.

Baby Boomers (Ages ~59-77)

Baby boomers have now overtaken millennials as the biggest group of home buyers. Boomers are often repeat buyers or retirees moving homes, and they tend to have more wealth and home equity. High rates haven’t deterred them as much because many can pay cash or make large down payments. NAR’s data shows only 49% of older boomers needed a mortgage at all for their home purchase.

Generation X (Ages ~43-58)

Many in this group are long-time homeowners with fixed rates, so like boomers they are often staying put. Those Gen Xers who are moving tend to be trading up to larger or luxury homes, but high rates and high prices have made that trade-up less enticing. Some Gen X homeowners have chosen to renovate their current homes instead of moving.

Millennials (Late 20s to Early 40s)

Many older millennials bought homes in the 2010s when rates were lower, but younger millennials trying to buy now face the dual hurdle of high prices and rates. As a result, millennials’ share of purchases has slipped somewhat as they delay buying or upgrade less frequently.

Gen Z (Early to Mid-20s)

The oldest of Gen Z are just starting to enter the market and face the steepest climb in terms of affordability. Many Gen Z buyers rely on co-buying with family or friends or receiving help for down payments. They’re more open to alternative paths like buying houses with rental potential (duplexes or homes with an ADU) to offset costs.

Housing Industry Impacts

The shifts in homebuyer behavior aren’t just affecting buyers and sellers – they’re also reshaping the housing industry itself.

Mortgage Lenders

Business has become much tougher for lenders since rates climbed. When rates doubled, the wave of homeowners refinancing their mortgages dried up almost completely, and fewer people applied for new purchase loans. Nearly two-thirds of mortgage lenders downsized their workforce in 2023 to cut costs. By early 2024, employment in the mortgage lending industry hit its lowest level in a decade.

Home Builders

Builders initially saw a boom during the pandemic, then a slowdown when rates spiked, and now an interesting middle ground. Many big builders have adapted by offering financing incentives or rate lock guarantees so a buyer’s rate won’t rise during the build period. We’ve also seen builders shift toward constructing slightly smaller or more affordable models that are within reach of today’s buyers.

Real Estate Agents

With sales volumes down significantly from the 2021 peak, agents are feeling the pinch. The National Association of REALTORS® saw its membership count drop in 2023 for the first time in over a decade. There were roughly 72,000 fewer full-time real estate agents in 2023 than the year before.

Agents who remain have had to adapt by doubling down on client service, expanding into additional roles (such as helping with rentals), or covering larger geographic areas to find business.

Looking Ahead: How Long Will High Rates Last?

Most experts expect current trends to continue at least in the short term. The Federal Reserve raised rates aggressively through 2022 into 2023 to combat inflation, and those actions pushed mortgage rates to their highest in 20+ years.

Mortgage rates are likely to stay in the mid-6% to 7% range through much of 2025, according to many forecasters. For example, a chief economist at Redfin predicted rates will “bounce around 7 percent” for the year. Fannie Mae’s outlook similarly sees 30-year mortgage rates averaging around 6.5% in 2025.

If rates indeed remain elevated, the behavioral changes we’ve discussed are likely to stick around. What could shift these patterns? The biggest game-changer would be a notable drop in mortgage rates. Many analysts think it could be 2026 or beyond before rates fall below 5% again in a sustainable way.

Demographics will also play a role. Millennials are aging into their prime homebuying years and will form households regardless of rates. Meanwhile, baby boomers will continue to age out of homeownership over the next decade, eventually increasing housing turnover.

In conclusion, rising interest rates have undeniably changed homebuyer behavior in the United States as of 2025. Buyers are more cautious, more likely to rent or stay put, and more often paying cash or choosing creative financing when they do buy. Everyone is watching the financial outlook: a substantial drop in mortgage rates could re-ignite buyer activity and shift behaviors yet again.