No other phrase has defined the 2023 housing market as much as the "mortgage rate lock-in effect" - a phenomenon that brought the industry to a standstill, putting downward pressure on everything from inventory levels to home sales. The pandemic-era sub-5% mortgage interest rates that 85% of mortgage holders are locked in to kept homeowners from selling their home and buying another at elevated interest rates, which peaked at 7.79% the week ending Oct. 26, according to Freddie Mac.
But what does the future hold? Will things change in 2024?
Signs of Improvement
There are signs that market conditions will be improving. Mortgage rates have dropped steadily over the past seven weeks, averaging 6.61% for a 30-year fixed mortgage, the week ending Dec. 28. This lower mortgage rate has provided a boost to existing-home sales, which grew in November, breaking a streak of five consecutive monthly declines, according to the National Association of Realtors.
Caption: A home for sale in Palm Beach, Florida.
Year-over-year, sales fell 7.3% in November 2023. However, experts believe that a marked turn can be expected as mortgage rates have plunged in recent weeks, as stated by Lawrence Yun, the Chief Economist of the National Association of Realtors.
Housing Shortages Will Continue
One thing most experts don't expect to see is an end to the shortage of homes for sale. However, households will have more options in 2024 due to a small uptick in single-family home construction and the completion of a large number of multifamily units that are under construction. Danielle Hale, the Chief Economist for Realtor.com, believes that the additional inventory of new construction homes and apartments will curb the uptick in home and rental prices.
Caption: Danielle Hale, chief economist for realtor.com
Odeta Kushi, the Deputy Chief Economist at First American, adds that today's acute supply shortage will be hard to undo. While single-family housing starts have steadily increased throughout 2023, it will take years of accelerated new home construction to narrow the supply shortage gap caused by more than a decade of underbuilding.
Caption: Odeta Kushi
Variations in Home Price Growth
Against the backdrop of a nationwide shortage, real estate activity is expected to vary significantly from market to market in 2024. Some top-growth areas are expected to see double-digit increases. Hale mentions that affordable markets in the Midwest and Northeast, like Toledo, Ohio, and Rochester, New York, are expected to experience high sales and price activity. Southern California, which had a particularly slow 2023, might also benefit from a reduction in mortgage rates.
The median existing-home price for all housing types in November 2023 was $387,600, a 4% increase from November 2022. Yun believes that home prices will keep marching higher and that only a dramatic rise in supply will dampen price appreciation.
Mortgage Rates and Affordability
Most experts predict that the average 30-year mortgage rate will linger in the range of 6.1% to 7% in the first quarter of 2024, then decline throughout the year. Redfin Chief Economist Daryl Fairweather suggests that mortgage rates will fall to about 6.6% by the end of 2024, bringing some much-needed relief to homebuyers.
Caption: Daryl Fairweather, chief economist for Redfin
However, election year volatility might make mortgage rates jumpy. Jeff Taylor, founder and managing director at Mphasis Digital Risk, suggests that the 30-year fixed rate estimates would be in the mid-6% range. He also provides insight into the income needed to buy newly built and existing homes based on different mortgage rates and projected home price changes.
New Construction on the Rise
With declining mortgage interest rates and an ongoing housing deficit, Robert Dietz, the Chief Economist for the National Association of Home Builders, forecasts an increase in single-family housing construction starts in 2024. This comes after declines in 2022 and 2023.
Caption: Robert Dietz, chief economist for National Association of Home Builders
Multifamily construction, on the other hand, is expected to experience a significant decline. Financing conditions are tight, and there are currently approximately one million apartments under construction, the highest total since 1973. However, the level of remodeling activity will remain flat, as the housing stock continues to age and requires reinvestment.
In conclusion, the housing market predictions for 2024 indicate a mix of challenges and opportunities. While housing shortages and price growth are expected to persist, improvements in mortgage rates and an increase in new construction offer hope for buyers and sellers alike. As the year unfolds, market dynamics and regional variations will play a significant role in shaping the real estate outlook.
