Housing Market Predictions 2024

 

As we enter 2024, the real estate market remains a topic of intense interest and speculation. The past few years have been a rollercoaster, with dramatic shifts in mortgage rates, housing inventory, and home values. Understanding these trends is valuable for homeowners, buyers, sellers, and investors alike. In this blog post, I’ll share my housing market predictions for 2024 and why I believe they will unfold. I will also analyze various factors likely to shape the industry in the year ahead.

Prediction 1: Interest rates to stabilize between 6-6.5%

As we reflect on the turbulence of 2023’s mortgage rate environment, most of the talk surrounded the relative level of interest rates. While the doubling of interest rates is certainly noteworthy, it is crucial to understand that buyers and sellers respond much more to the volatility in mortgage rates than they do to the relative level of mortgage rates. The unpredictability of rates paralyzes consumers as it becomes virtually impossible to know how much home you can afford or how much your potential mortgage payment will be from week to week. Rather than play the guessing game, people just hopped to the sidelines.

Mortgage rates averaged 6.8% in 2023 but started at 6.13% in January and climbed sporadically until peaking in November at around 8%. That is a 30+% increase and a loss of $80,000 - $100,000 in purchasing power.

So, what does 2024 have in store? If real estate used to be all about ‘location, location, location,’ now it is ‘inflation, inflation, inflation.’ Why? Because inflation is the reason interest rates have taken flight in the first place. It is the biggest influence, along with unemployment, on the central bank’s monetary policy, which is the guiding hand on mortgage rates.

However, I believe we are in for a bit of a reprieve in 2024, considering inflation has been trending in the right direction since it peaked in June 2022, as evidenced by the year-over-year decline in both the Consumer Price Index (CPI) and the Personal Consumption Expenditure (PCE) Index, excluding their volatile food and energy components—two of the Federal Reserve’s preferred inflation gauges— by 30%. Coupled with hints from Jerome Powell, the Chairman of the Central Bank, that not only may the Fed be done with monetary tightening, but rate cuts are a possibility for 2024, lends credence to my forecast of interest rates stabilizing within a 6-6.5% range.

Now, granted, rate cuts are not guaranteed, of course. The Central Bank’s decisions are data-dependent, so it is still a game of wait-and-see. While 6.5% mortgage rates may not be the boon many hoped for, they do promise a more stable market, which is essential for planning major decisions like buying or selling a home.

Prediction 2: We will see inventory levels improve by ~10%

In real estate, inventory is measured by how long it would take to absorb the current supply of homes on the market. In 2023, there were 3.6 months of inventory, up from 3.3 months in 2022. Unfortunately, a balanced market supplies 5-6 months of inventory, so to say this has been a supply-constrained market would be an understatement.

The funnel of inventory—new listings—closed almost entirely in 2023 due to the “lock-in” effect. Homeowners became increasingly deterred from selling their homes as interest rates climbed from 3% to 8% in just twenty months. In fact, 90% of all homeowners currently have a mortgage rate below 6%, and 25% hold a mortgage rate of 3% or lower. So, considering that 70% of people need to buy a new home after they sell the previous one, put yourself in their shoes. You would not want to move either if it meant your new interest rate would inevitably double (effectively cutting your buying power by a third and forcing you to possibly downgrade), unless you were moving to a significantly less expensive market.

The news is not all bad. I believe many would-be sellers are waiting in the wings for a more advantageous market environment to list their homes. However, they cannot kick the can down the road forever, and stable mortgage rates make moving less incalculable and likely give them the confidence to make the jump and list their homes in 2024.

As a matter of fact, the data has already begun to signal that this trend may be taking hold. As interest rates dropped below 7% in December, we are already seeing sellers ease their way back into the market, and new listings are finally beginning to exceed the levels they were a year ago. Coincidentally, inventory levels are moving up as well.

On top of that, the lock-in effect will inevitably erode; considering that around 5 million homes are traded in the U.S. each year, we can reasonably count on 5 million more homeowners who will not have a sub-6% mortgage rate that they feel compelled to hold on to.

Considering all these factors and influences, I believe inventory will moderately increase by ~10% with months of supply reaching 3.9-4 months; no mad flood, but hey, beggars can’t be choosers, right?

Prediction 3: Home values will increase between 3-5%

Predicting future home values is notoriously difficult, but this is a prediction article, so I have to provide receipts. So, where to start?

One of the most reliable leading indicators is the rate of price reductions. In 2022, 40% of homes required a price cut before finding a buyer; this figure edged down to 37% in 2023. While not a seismic shift, it’s a step towards the historical norm of 30-35%, indicating a trend approaching market equilibrium.

What do price trends indicate? Would you believe me if I told you that even with mortgage rates flocculating the way they did in 2023, prices ended 2023 up 4.4% year over year, with the national median home price of a single-family home standing at $417,000? If not, you’re not alone. This surprised even the experts because, typically, when mortgage rates go up, home values come down. The more expensive borrowing becomes, the less buyers can afford to pay for their new home. So why did home prices increase then? Yes, demand was subdued due to high mortgage rates, but the lack of supply was suppressed even further. This tight supply has created a baseline that helps to keep home prices from falling too steeply, illustrating the classic balance of supply and demand in real estate.

Looking forward with mortgage rates stabilizing, incremental affordability improvement, and the shortage of 5 million homes in the U.S. lingering, price appreciation seems inevitable in 2024. However, with interest rates likely staying in the 6-6.5% range, affordability will remain under pressure, so we will not see an overwhelming surge in demand. Therefore, my prediction for home value appreciation is modest in the 3-5% range. This growth will be underpinned by a parallel rise in inventory and sales activity, typically leading to price increases.

Now, it’s always prudent for anyone putting out a theory to play devil’s advocate. Should interest rates fall into the 5% range, we would likely witness a significant uptick in demand and a reduction in inventory levels, leading to increased competition and price appreciation, potentially reaching 5-10%. On the flip side, if inflation reemerges its ugly head and interest rates trend back in the 7.5%-8% range, we will begin to see inventory build and sales slow, signaling a market downturn, and we will revisit the trends we saw in late 2022, and home values will decline.

Prediction 4: Sales will increase by 10-12% in 2024.

Last year’s sales figures were dismal. In December, the annual rate of existing home sales hit $4.09 million, a low not seen in 30 years, which, of course, includes the Global Financial Crisis (GFC). This downturn can be attributed to a perfect storm of high prices, soaring mortgage rates, and the grip of the lock-in effect. It begs the question: were sales down due to a genuine lack of demand, or was there pent-up demand waiting for a more favorable market?

I believe it is safe to say that demand is pent up due to the fact that throughout the year, every time we saw interest rate declines in a meaningful way, there would be a significant uptick in mortgage applications, indicating that buyers are simply waiting for a breath of affordable air to re-enter the market. This is also affirmed by December’s pending sales (homes that have gone under contract), another leading indicator for sales numbers, which are up 4% month over month and up 6% year over year.

 So, with rates maintaining a range 1.5% points below their peak and more inventory bound to hit the market, I see a 10-12% increase in home sales is in the cards for 2024. A market environment where buyers will have more options and optimism and sellers have more certainty and confidence in both their home’s value and cost of moving.

The pace of new sales is, in fact, already accelerating. At the time of this article, sales are up 5% compared to last year, and this is before the spring buying season has even kicked into gear.

Conclusion

As we’ve journeyed through the potential landscape of the 2024 real estate market, we’ve touched upon several key areas that could significantly influence the housing scene. We’ve discussed the possibility of interest rates finding a stable range, the likelihood of an increase in the number of houses available for sale, the expectation of home values seeing a modest rise, and the anticipation of a boost in the number of houses sold. These predictions paint a picture of a real estate market that’s evolving and adapting to new economic conditions and trends.

It’s always fascinating to make predictions and even more interesting to see how they unfold. As we move through the year, I’ll be keeping a close eye on these trends and how they develop. At the end of the year, I look forward to reflecting on these predictions to see what I got right and what I didn’t. The world of real estate is dynamic and full of surprises, and it’s this unpredictability that makes following the market so compelling. Whether you’re directly involved in real estate or simply interested in understanding the market dynamics, staying informed is key. Let’s reconvene at the end of 2024 and see how the year shaped up against these predictions. Happy house hunting, selling, or investing as you navigate the 2024 real estate market!