Whether it was a soaring stock market defying constant expectations of doom, a job market refusing to quit despite higher interest rates from the Fed or a housing market largely frozen in place due to steep mortgage rates, 2023 was full of surprises. In 2024, we’ll find out if the housing market can enjoy the same type of soft landing seemingly engineered by the Federal Reserve for the U.S. economy.
READ: When Will the Housing Market Crash?
Key Takeaways:
— Even if mortgage rates decline closer to 6% in 2024, given that nearly 90% of homeowners are still paying mortgage rates below 5% (and about two-thirds with rates under 4%), many sellers will delay listing their homes for sale due to this “lock-in effect.” This effect is unlikely to unravel on a larger scale until rates retreat below 5% — or prices adjust accordingly.
— As housing markets slowly unfreeze along with lower mortgage rates, local markets which have become increasingly disconnected from local incomes may be more likely to see price declines. If more employers are successful at bringing workers back to offices four or more days per week, those declines could be more rapid if owners in far-flung locations are forced to sell.
— Due to an ongoing supply glut in certain markets, renters will gain the upper hand as new apartments are completed and landlords compete for the same demand pool. This glut could also be expanded by owners of short-term rentals in oversaturated markets who are converting them to long-term rentals, adding more supply for traditional renters. Lease incentives including periods of free rent are likely to become increasingly common.
Just over a year ago, when I suggested to “expect a year of uncertainty mixed with the market slowly trending in favor of buyers,” that was mostly due to six ongoing trends in place at the time. These trends, including stubborn inflation (and higher mortgage rates), economic growth (or decline), the moving target of remote work, labor shortages, monetary tightening by central banks and turbulence in financial markets all came into play during the year.
Few professional economists and their armchair compatriots in homes and offices around the country would have predicted the most unexpected item of 2023: the Federal Reserve seemingly engineering a soft landing in its fight against inflation without causing a recession.
If anything, Fed Chair Jerome Powell was consistently derided for hiking rates too late and keeping them high for too long, leading in part to a semifrozen housing market with most potential sellers refusing to part with their unusually low mortgage rates.
In turn, the lowest inventory of existing homes for sale in decades helped propel a dramatic shift favoring new home builders and the incentives they could offer in the form of mortgage rate buydowns — against which most willing sellers of existing homes had little ammunition.
At the end of 2023, the stock market was certainly celebrating, and mortgage rates had fallen from recent highs on the assumption of several federal funds rate reductions throughout the year. The overhang of excess jobs versus the number of unemployed workers had fallen, fewer people were quitting in search of greener pastures (pun intended), and the unemployment rate remained under 4%. Celebrations were certainly in order.
However, Fed officials are cautioning that their work is not done yet and getting to the finish line of inflation closer to 2% per year may delay lower rates in 2024. Besides higher inflation potentially returning given a tight labor market for services, rising price tags for climate-related disasters, emerging geopolitical tensions around the world and numerous elections around the world — the most in recorded human history — this year will likely also provide its own unexpected events. The most likely potential domestic risks to the economy from these factors could include higher oil prices and backed-up supply chains.
For the housing market, lower mortgage rates are widely expected to lead to a surge in pent-up demand for not just new homes but for existing homes offered by sellers who need to move for a variety of reasons. Average fixed 30-year mortgage rates, which last peaked at 7.8% in late October, have since fallen by over 100 basis points, suggesting an early start to the homebuying season.
Homebuilders are certainly feeling more bullish, with the NAHB/Wells Fargo Housing Market Index rising three points to 37 in December, reversing a four-month decline. The six-month outlook is even better, rising six points to 45. Still, actually selling new homes in an environment of elevated mortgage rates is challenging, with 36% of builders reporting cutting home prices by an average of 6%. A much higher share of builders (60%) offered various sales incentives in December, matching November’s share but edging down from 62% in October.
The decline in mortgage rates also prompted more activity in housing starts, which surged in November to a six-month high of 1.56 million per year. With the rising popularity of build-to-rent homes, builders were more bullish on single-family units. These starts surged over 42% year-over-year to 1.14 million per year, the highest level since April 2022.
While multifamily developers did start nearly 9% more units in November versus October, the year-over-year decline of nearly 34% does point to abundant supply in multiple markets. The disconnect between single- and multifamily demand and supply will likely become more obvious in the months ahead, with rising vacancy rates, falling rents, more tenant incentives and higher cap rates indicating additional risk for apartment landlords.
Related: Things to Know Before Building a New Home
National Housing Market Predictions for 2023
The following includes a 2022 summary, a forecast for all of 2023 and some predictions for the housing market in 2024, which assume the U.S. economy avoids a recession but grows much more slowly during the year. However, should the country enter a recession, these predictions would change accordingly.
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Home Prices Will Mostly Hold Gains and Edge Up as Mortgage Rates Fall
Given the continued strength of the economy and mortgage rates on the decline, existing home prices in 2024 are predicted to edge up by 0.7% nationally. However, prices could fall in some high-priced areas and those regions in which home values rose faster than local incomes could keep up, especially if more employers transition to more restrictive remote work policies.
Existing Home Sales Will Jump as Mortgage Rates Decline
Although the combination of low affordability and the lock-in effect of low mortgages for existing homeowners will continue to limit listings and sales, that may change if mortgage rates fall faster than expected. In addition, the nearly 40% of homeowners without any mortgages may be enticed to sell. Other owners will convert their homes to rentals while awaiting lower mortgage rates and possibly further increases in value.
New Home Sales Will Continue to Moderately Rise
With homebuilders able to offer the housing supply lacking in the existing home market, newly built homes accounted for nearly one-third of housing inventory in 2023, up from an average of 10%. In addition, new construction captured about 15% of all single-family detached home sales during the year, the highest share in a decade. Given the advantages enjoyed by homebuilders, including higher energy efficiency, the latest design trends and the ability to offer mortgage rate buydowns, new home sales are predicted to continue rising in 2024.
Related: Should I Buy a House Now or Wait?
Home Rents Will Flatten Out and Even Decline in Some Markets
After surging in 2021 and 2022, rent increases flattened as 2023 continued and will likely remain steady or even slightly decline in 2024. With over one million multifamily units under construction in late 2023, asking rents could decline in those markets facing supply gluts. More existing rental supply could also be offered by short-term rental owners facing excessive inventory as well as existing homeowners opting to become landlords, especially if they can pull out some equity to help fund another home purchase.
Housing Starts Will Vary Depending on Sector
After surges in housing starts in 2021 and 2022, followed by a sharp decline in 2023, in 2024 the direction of housing starts will depend on the sector. For single-family homes, look for starts to rebound given lower mortgage rates and the rising popularity of build-to-rent (BTR) homes. For the multifamily sector, however, starts are predicted to continue falling given the large number of homes currently under construction.
Building Permits Will Rise for Single-Family Homes but Fall for Multifamily Units
Permit growth in 2024 will likely be positive for single-family homes but negative for multifamily units. Although the trendy BTR category has no shortage of demand, rising costs for land, materials, labor and financing are making such developments less profitable in certain markets. Meanwhile, builders focused on traditional for-sale homes are holding the line on prices by adjusting standard specifications and constructing smaller homes. An overbuilt apartment sector in certain markets will likely mean a decline in national multifamily permits in 2024.
30-year Fixed Mortgage Rates Will Fall but Remain Over 6%
Although the Fed seems to have tamed inflation, mortgage rates are expected to remain relatively high due to inflation that is trending lower but slowly, mortgage bond investors demanding higher rates on the assumption that new mortgages are more likely to be refinanced within a few years as rates fall, and a Federal Reserve insistent on returning inflation closer to 2%. Even the Fed’s most recent median forecasts don’t see inflation subsiding to 2.0% until 2026, so mortgage rates under 6% may not happen until sometime in 2025.
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Looking Ahead: Will the 2024 Housing Market Slowly Unfreeze? originally appeared on usnews.com
Update 01/04/24: This story was previously published at an earlier date and has been updated with new information.
