The U.S. real estate market has experienced significant shifts in the past year or so, largely due to the Federal Reserve's measures to control inflation by increasing interest rates. These policies profoundly influenced the housing market for both buyers and sellers.
Buyers faced heightened borrowing costs, dampening affordability and delaying home purchases. Sellers, enjoying low-rate mortgages from the pandemic era, hesitated to enter a market marked by higher rates.
After their meeting in December 2023, Federal Reserve's hinted at a policy shift, pausing further interest rate hikes and signaling the possibility of rate cuts in 2024.
This development has injected optimism into the housing market, pointing to the potential for lower mortgage rates and a more vibrant market throughout 2024.
Home prices, mortgage rates, and inventory levels will all shape the U.S. housing market this year. In this article, we explore these factors and their implications for home buyers and sellers.
Experts Project Home Prices Will Increase
Despite challenging market conditions, home prices have shown remarkable resilience. Following a temporary decline in the latter half of 2022 and into early 2023, home prices have started to rise again. This upward trend persisted even as mortgage rates soared to a peak of 7.79% in October of last year.
A key reason behind the stability of home prices, contrary to some predictions of a crash, is the ongoing shortage of inventory, which remains well below the threshold that would be necessary to significantly drive down prices.
“You’re not going to see house prices decline,” says Rick Arvielo, head of mortgage firm New American Funding. “There’s just not enough inventory.”
Forecasts into 2024 suggest continued price growth, with the Mortgage Bankers Association projecting the largest increase at 4.1%, while mortgage giants Freddie Mac and Fannie Mae predict more modest growth at 3.2% and 2.6%, respectively. Realtor.com stands out from the others by anticipating a drop in prices of 1.7%.
- For Buyers: Affordability will continues to challenge buyers in 2024. However, buying now could lead to home value appreciation and equity gains over time. Conversely, waiting might result in higher future costs, as current trends suggest rising home prices.
- For Sellers: Despite slower price growth, it's a good time to capitalize on your equity and stand out in a less saturated market. Get in touch for tailored advice and to understand your home's current market value.
What's Ahead for Mortgage Rates?
Over the past year, mortgage rates surged in response to the Fed's monetary policies aimed at controlling inflation. This hike cooled the previously overheated housing market.
Inflation is showing signs of moderating, and typically, mortgage rates fall as inflation cools. This trend has been evident in recent weeks. The Federal Reserve's decision to pause its Federal Funds Rate increases, with potential rate cuts on the horizon for 2024, bolsters expert confidence in declining mortgage rates.
The average rate for a 30-year fixed mortgage loan peaked at 7.79% in the last week of October 2023, marking the highest average in over two decades. However, rates have since trended downward. The current average rate for a 30-year fixed mortgage is 6.69%, a significant drop from last year's peak.
Forecasts for the end of 2024 vary slightly among experts. NAR predicts an average rate of 6.3% by the fourth quarter of this year. Wells Fargo economists and the Mortgage Bankers Association are more optimistic, projecting the average 30-year fixed rate to fall to around 6% by the end of 2024. Fannie Mae, the largest mortgage financier, has the least optimistic outlook of the major forecasters, predicting the average will be 6.5% by the end of the year.
While no one can predict mortgage rates with absolute certainty, the Federal Reserve's recent policy decisions suggest a positive outlook. Though some volatility may persist, overall affordability is expected to improve as rates continue to ease.
- For Buyers: Lower borrowing costs mean enhanced affordability, potentially widening the pool of properties within your budget. It also means that buyers can secure loans with more favorable terms, reducing the long-term financial burden of homeownership.
- For Sellers: Sellers stand to benefit from lower mortgage rates as well. Reduced rates often translate to increased buyer demand, as more people find it financially viable to purchase homes. This can lead to a more dynamic market, with sellers enjoying a broader audience for their listings and potentially quicker sales cycles.
Tight Inventory Conditions Will Persist
One of the defining features of the real estate market in recent years has been the low inventory levels, which have driven up home prices and created a seller's market. As 2024 unfolds, the question is whether this trend will continue or if we'll see a shift to a more balanced market.
Recent data from Realtor.com indicates a nuanced picture. As of October 2023, there has been a modest increase in national housing supply of just over 5% month-over-month. While inventory is up in some markets, the overall number of homes for sale remains substantially lower than typical levels seen in the "normal" pre-pandemic years.
A significant factor influencing the current market is the mortgage rate lock-in effect. Many U.S. homeowners are currently benefiting from mortgage rates significantly lower than today's average. This financial advantage has led to a reluctance to sell and re-enter the market at higher rates, contributing to the inventory shortage.
Lawrence Yun, a leading economist at NAR, anticipates a shift in seller behavior. Speaking at a conference in November, he predicted a surge in listings as homeowners adjust to market conditions. "With the realization that life must move forward, we expect a wave of pent-up sellers to enter the market," he suggested. Yun foresees inventory to climb about 30% from 2023’s all-time low.
However, opinions among experts vary. “I don’t expect to see a meaningful increase in the supply of existing homes for sale until mortgage rates are back down in the low 5% range, so probably not in 2024,” says Rick Sharga, founder and CEO of CJ Patrick Company, a market intelligence advisory firm.
The current market conditions also have roots in the aftermath of the 2008 housing crash. Since then, new home construction has not kept pace with historical norms, resulting in a prolonged inventory deficit. This shortfall has been a key factor in maintaining low inventory levels.
Newly built homes are becoming an increasingly significant part of today’s housing inventory. The National Association of Home Builders (NAHB) reports that newly built homes made up 31% of the total homes available for sale in November, significantly higher than the historical average of approximately 12%.
And even more new homes are on the way. Encouragingly, the latest Census report indicates that builders are now achieving long-term construction averages, signaling a potential rise in the availability of new homes.
- For Buyers: An increase in inventory is good news for buyers. It means more options, but you still need to brace for potential bidding wars and prepare to make a strong offer. Have a firm budget in mind before entering the real estate market.
- For Sellers: And, if you’re trying to sell, rest assured you haven’t missed your window of opportunity to potentially get multiple offers or see your house sell quickly. While inventory has ticked up some nationally, overall, it’s still low.
A More Active Real Estate Market in 2024?
While home prices more than held firm in 2023, the U.S. housing market experienced a year-over-year decline in home sales as elevated interest rates kept many home buyers and sellers on the sidelines during 2023.
Significantly, the declines shrunk from a low of -37.5% in January to just -4.8% in November. This is seen as a potential early indicator of a market revival in 2024. Buyers and sellers, who have been waiting out the high rates, might start re-entering the market, especially if mortgage rates continue their downward trend in 2024.
“Lower mortgage rates would help spur home sales activity, which are expected to increase in 2024 compared to 2023,” predicts Selma Hepp, chief economist at CoreLogic. “Declines in mortgage rates will drive more sellers to trade their existing home and help add much-needed inventory to the market, leading to more transactions.”
Additionally, there are indications that potential home buyers who were holding out for lower rates may be growing impatient. According to a recent Bank of America survey, the percentage of those willing to wait for prices or mortgage rates to decrease before buying a home has dropped from 85% to 62% in a mere six-month period.
Lawrence Yun, chief economist at NAR, is projecting sales of existing homes will climb 14% this year. That would be the biggest annual gain in more than four decades, according to data from NAR.
The broader economic landscape, including job market strength and consumer confidence, will also play a significant role in shaping buyer and seller behaviors. A stable or improving economy, combined with lower mortgage rates, could lead to a bustling real estate market in 2024.
- For Buyers: Buyers are likely to experience a more welcoming market, with more options and negotiating power. Lower rates increase purchasing power, allowing buyers to consider a wider range of properties or to save on interest payments.
- For Sellers: For sellers, the increased buyer interest can lead to more competitive pricing and potentially faster sales. Sellers can anticipate a larger pool of potential buyers, which may lead to more competitive offers and a favorable selling environment. However, they will also need to be mindful of market pricing to attract the right buyers.
As we start 2024, the U.S. real estate landscape is poised for change, shaped by evolving mortgage rates, home prices, and inventory levels. Staying informed and agile will be key to navigating the 2024 real estate market successfully. As a real estate agent committed to guiding my clients through these changes, I remain dedicated to providing expert insights and tailored strategies for every real estate journey.
