The Good and Bad News for Housing in 2025

Last year was a complicated one for housing. We saw federal initiatives incentivize cities to reduce building restrictions; a bump in completed units led to a hopeful growth in vacancy rates that, in some places, cooled rents; and Congress starting to tackle private equity’s influence on rentals. None of this suddenly solved our current housing woes, of course—homelessness grew by 18 percent in 2024—but these efforts in tandem with local housing trends like the wide adoption of ADUs, more efficient homes, and office-to-residential adaptive reuse projects could show us what’s around the bend for housing this year.

ADU Innovation

Accessory dwelling units (ADUs) have been a focus as cities incentivize the construction of new units. New York’s "City of Yes" plan includes ADUs as part of its densification strategy; California has made it possible to build granny flats statewide; Chicago’s ADU pilot program could be extended to the entire city in 2025. For homeowners looking to subsidize their mortgage or downsize, ADUs can present an opportunity. They haven’t proven a panacea to the housing crisis yet, however, since permitting and zoning regulations aren’t always clear, or have yet to be developed.

The advent of ADUs has led to solutions meant to fast-track builds, which range from designs preapproved by cities to consultants who can assist in managing the paperwork. Groups like BuildCasa in California can provide cost estimates and manage permitting. In Chicago, real estate development database Chicago Cityscape provides a step-by-step manual for navigating the city’s approval processes (including finding an architect). Some prefab ADU builders offer turnkey solutions, like Haus.me, which makes units small enough that they don’t require permitting depending on the jurisdiction.

The year 2025 could very well see the growth of the ADU industry, not only through policy reforms but with private sector businesses seeking to take advantage of new and loosening regulations around backyard, basement, and attic homes. The next ADU evolution will need to face hyperlocal bureaucratic challenges and respond with bespoke solutions. Particularly as longtime homeowners shy away from selling to maintain their interest rates, aging in place without the burdens of upkeep to a larger home may require the ADU industry to develop accessible and easily deliverable units for aging boomers.

Embracing Smaller Homes

It’s not just ADUs that will define smaller living. The average American home size peaked at 2,687 square feet in 2015, according to Rocket Mortgage, and fell to 2,400 square feet in 2023. Zillow predicts that new homes will continue to shrink; the National Association for Home Builders (NAHB) notes that this will be driven by affordability. In 2023, one-third of builders cut home prices, states an April 2024 NAHB press release, wherein the average home price dropped by six percent. As Dwell reported last year, smaller home sizes correlate with greater sustainability—it costs less to heat and cool a home with less square footage—affirming another Zillow prediction: buyers seeking out sustainable homes. In lieu of higher tech upgrades like heat pumps or solar, buyers may simply opt for smaller spaces. In its report of 2025 housing trends, Zillow also stated that 86 percent of recent home buyers surveyed said they place importance on having a home with at least one climate- and disaster-resilient feature, like water-tight windows, doors, and roofs, or fireproof home materials.

And while smaller spaces might be more affordable and more sustainable, this could also hint toward a generational shift in lifestyle preferences. The NAHB cites a 2023 "What Home Buyers Really Want" study, which showed "a downward shift in buyer preferences for home size in the last 20 years. In 2003, the typical buyer wanted 2,260 square feet; now, that number is 2,067 square feet." Redditors have suggested that a smaller home is easier to maintain and clean, a notion supported by a U.S. News and World Report story that shows millennial’s want to "simplify" their lives, while Apartment Therapy speculates that the demand for smaller homes, particularly among this age group, could correlate with lower birth rates. Regardless, combining lifestyle and affordability factors could continue tipping new developments toward more efficient single-family dwellings.

Blossoming Office-to-Residential Conversions

New multifamily construction starts fell "dramatically" at the end of 2025, reads a report from MultiFamily Dive, but there are still plenty of apartments to be excited about in the coming year. Class B and C commercial properties—those aging, post-World War II buildings—have languished in many American business districts; the past few years have been characterized by a reawakening of their potential. The office-to-residential conversion boom is upon us, and this year some of the largest conversion projects are moving forward.

There are two projects currently underway that, while not the first adaptive reuse of aging office towers, could set a new bar for the typology. In New York, 25 Water Street, a 22-story office tower built in 1969, will become an apartment building and is slated to wrap up this November. The project currently plans to deliver more than 1,300 units, making it the largest office-to-residential conversion in history according to Newmark, a New York-based advisory group that arranged the project’s $538 million loan. While the Water Street project is a luxury-style multifamily building, its sheer scale holds promise for the arduous challenges of managing the large floor plates inherent to Class B and C buildings. Particularly considering the building’s original brutalist style—which isn’t known for yielding light-filled spaces desirable in modern residences—the development team (including GFP Real Estate and Metro Loft with builder STO) have added light wells and a 10-story overbuild, and completely overhauled the facade.

In Chicago, the LaSalle Street corridor revitalization is well underway. Last year, Chicago Mayor Brandon Johnson approved $151.2 million dollars in funding to transform three postwar buildings in the downtown financial district into 1,000 units of new housing. While these projects are slated to be completed in the coming years, they hold the potential to completely transform an entire sector of the city’s business corridor. There are also some savvy design moves, but the projects are part of an entire urban revitalization plan that will also add 300 units of affordable housing as part of the total delivered apartments. It could make the case for adaptive reuse as a part of a broader New Urbanist scheme that blurs living and working, as downtowns become both business and residential neighborhoods.

Tariff Anxiety

There is still so much uncertainty around how the incoming Trump administration could change the residential housing market, but there has certainly been speculation around import tariffs—10 to 20 percent on all imported goods, and duties as high as 60 percent on Chinese imports, which would likely affect the home appliance market, according to ProBuilder. It is, of course, speculation based on promises made from the campaign trail. A January 6 Washington Post story notes that Trump’s aides are "still discussing plans to impose import duties on goods from every country…center[ing] on imposing them only on certain sectors deemed critical to national or economic security." This could mean, specifically, tariffs on items like steel, iron, copper, and aluminum—all necessary for the building trade.

It’s not the first time Trump has placed tariffs on such materials. In his first presidency, he placed a 25 percent duty on foreign steel; a 2018 New York Times story noted that it "unsettled" the market, especially for smaller companies with "less leverage over suppliers." But it also favors larger developers and contractors who are more easily able to absorb extra costs. A report from the Construction Financial Management Association states that, in 2018, the producer price index jumped 12.3 percent for steel mill products, yet the amount contractors charged rose by only 4.3 percent, "implying that contractors absorbed the increase in costs and shrank potential profit margins."

By contrast, the Cincinnati Enquirer published a 2019 story on Trump’s 2018 tariffs on Canadian softwood, which reportedly "added between $8,000 to $9,000 to the cost to build a new home" in the area. The story also notes that, for boutique builders, constructing smaller and less expensive starter homes became financially challenging due to the high prices of materials and fixtures. For these contractors and developers, they say, much of these extra costs are passed onto consumers, potentially making homes less affordable to buyers. 

Top photo by Halbergman/Getty Images

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How the Biden Administration Addressed the Housing Crisis This Year

The ADU Boom Has Begun. Is It Adding the Housing We Need?