No other term has defined the real estate market in 2023 as much as the “mortgage rate freeze in effect” — a phenomenon that brought the industry to a standstill and put pressure on everything from inventory levels to home sales.
The sub-5% mortgage interest rates prevailing during the pandemic, which 85% of current mortgage holders are locked into, discouraged current homeowners from selling their home and buying another at increased interest rates, which were reported to have increased in the week ending March 26. October peaked at 7.79% on Freddie Mac.
But will anything change this year?
There are signs that market conditions will improve.
Mortgage rates have fallen steadily over the past seven weeks, averaging 6.61% for a 30-year fixed-rate mortgage in the week ending December 28.
According to the National Association of Realtors, lower mortgage rates fueled a boost in existing home sales, which rose 0.8% in November from October, breaking a streak of five straight monthly declines.
Year-on-year sales fell 7.3% (versus 4.12 million in November 2022).
“A significant turnaround is expected as mortgage rates have fallen in recent weeks,” said NAR Chief Economist Lawrence Yun.
The housing shortage will continue
What most experts don't expect is an end to the shortage of homes for sale.
“Nevertheless, households will have more options in 2024, from a slight increase in the construction of single-family homes to the completion of the large number of multi-family homes currently under construction, the vast majority of which are intended for rental homes.” says Danielle Hale, chief economist at Realtor.com.
The additional inventory of new houses and apartments will slow the increase in house and rental prices, even if the ongoing shortage prevents prices from falling too much.
But as rapidly rising mortgage rates have driven affordability to record lows, builders have responded by slowing production, says Odeta Kushi, deputy chief economist at First American.
“Builders can now reduce the backlog of homes already under construction. “But even if these homes eventually come on the market, the housing market will likely remain structurally undersupplied,” she says.
Property price growth will vary from market to market
With this in mind, nationwide sales in 2024 are expected to see only a slight increase from the long-term low of 2023. Hale said real estate activity will vary significantly from market to market, with some high-growth areas expected to see double-digit growth.
Combined sales and pricing activity is expected to be highest in two major market groups. The first are affordable markets in the Midwest and Northeast such as Toledo, Ohio, Rochester, New York, Hale says. The second group is in Southern California, where a cut in mortgage rates could help the region recover from a particularly weak 2023.
The median existing home price for all housing types was $387,600 in November, up 4% from November 2022 ($372,700). All four US regions saw price increases.
“Real estate prices continue to rise,” says Yun. “Only a dramatic increase in supply will curb price increases.”
Mortgage Rates and Affordability
Most experts expect the average 30-year mortgage rate to remain somewhere between 6.1% and 7% in the first quarter and then decline throughout the year.
“Mortgage rates are likely to remain well above pandemic-era record lows as financial markets increasingly expect the country to avoid a recession in 2024,” said Redfin chief economist Daryl Fairweather. “By the end of 2024, mortgage rates will fall to around 6.6%. The gradual decline in interest rates combined with the slight fall in prices will provide much-needed relief to homebuyers.”
According to Jeff Taylor, founder and managing director of Mphasis Digital Risk, election year volatility will send mortgage rates soaring, putting estimates for 30-year fixed rates in the mid-6% range.
At an interest rate of 7.125% and current average home prices, $111,000 and $107,000 of household income would be required to purchase newly built and existing homes, respectively, at a 5% discount, Taylor says.
If mortgage rates fell 1% to 6.125% and home prices rose a modest 4%, as forecast by the FHFA in 2024, $105,000 and $99,000 would be required to purchase newly built and existing homes, respectively buy, with a decline of 5%.
New construction of a house
Amid a decline in mortgage rates and a continuing housing deficit, Robert Dietz, chief economist for the National Association of Home Builders, predicts a rise in single-family housing starts in 2024. This will be the first year of an increase following declines in 2022 and 2023.
“Due to the low inventory, new construction has increased in recent months to around a third of the total single-family home inventory, whereas in the past it was only 10 to 15%,” says Dietz.
Multi-family construction will see a significant decline. Financing conditions are very tight and around one million homes are under construction, the highest number since 1973.
The extent of conversion activities will remain approximately the same in 2024 compared to 2023. The housing stock is aging and requires new investment (the typical home in the US is nearly 40 years old).
Swapna Venugopal Ramaswamy is a housing and business correspondent for USA TODAY. You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.