Housing economists offering forecasts were wrong about 2023.
Few thought home sales would fall off a cliff the way they did this year, dropping by about 17% from their high in February to their low in October, according to the National Association of Realtors.
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Most thought home prices wouldn’t increase by much. Yet prices hit record highs this year, climbing 7% since the beginning of the year and are now 1% higher than at the peak in 2022, according to Case Shiller.
And virtually no one saw mortgage rates of nearly 8% coming. When the average 30-year, fixed-rate mortgage hit 7.79% at the end of October, according to Freddie Mac, it was the highest level in 23 years.
It all combined to create the least affordable housing market in a generation. Sales of existing homes dipped below 4 million units, reaching levels last seen in 2010. But still, even with fewer buyers, home prices kept climbing because there weren’t enough homes on the market and competition pushed prices higher.
Will this picture improve in 2024? What should homebuyers expect next year?
“Early this year, I called 2023 the year of disappointment,” said Jonathan Miller, president and CEO of Miller Samuel Real Estate Appraisers and Consultants. “This year I’m calling, the ‘year of incremental change.’”
The idea, he said, is that 2024 will bring gradual improvement in home sales, prices and mortgage rates, but there will be few sudden moves.
For weary homebuyers wary of big swings and sudden lurches in the market, it may be a welcome change of pace.
Rates should come down slightly
Mortgage rates have already fallen for nine consecutive weeks and are expected to drop further in 2024, although they are not likely to go below 6%.
The average rate for a 30-year fixed-rate mortgage has dropped nearly a whole percentage point this year, landing at 6.61% in the final week of December.
The Federal Reserve’s historic campaign to rein in inflation through interest rate hikes had a powerful impact on the housing market, cutting demand as rates surged and pushing would-be homebuyers out of the market.
“Rising mortgage rates in 2022 and 2023 were perhaps the biggest reason for the housing market being stuck in neutral,” said Skylar Olsen, Zillow’s chief economist. “A recent mortgage rate dip has sparked more activity.”
Rates in the 3% range seen in 2020 and 2021 are not coming back, she said, “at least without another economic crisis that we do not want and should not hope for.”
But still, she said, “a continued, slow descent — or even rates holding steady — in 2024 would be a welcome break after an unrelenting rise and unpredictability the past two years.”
Realtor.com forecasts that mortgage rates will average about 6.8% during 2024 and end the year closer to 6.5%.
Lawrence Yun, chief economist at NAR, said he expects the 30-year fixed mortgage rate to average lower, at 6.3% in 2024, and that the Fed will cut rates four times. That could calm inflationary conditions, in response to slower economic activity.
Affordability will improve somewhat
In October, a typical homebuyer would have spent more than 40% of their earnings on their mortgage payment. That’s an all-time high, according to Zillow’s data, which stretches back to the 1990s.
As mortgage rates come down slightly in the new year and more homeowners who have been clinging to their ultra-low mortgage rates see the gap narrow between the rate they have and the prevailing mortgage rate, more homeowners will put their home up for sale.
This will bring more inventory to the market, allowing for prices to come down slightly in some markets and stop rising in others.
But anyone holding their breath for home prices to fall considerably may be turning blue.
Zillow’s latest forecast calls for home values to hold steady in 2024, falling by just 0.2% by year’s end. Realtor.com’s forecast calls for home prices to drop a little more, falling 1.7% in 2024 from this year.
NAR’s latest forecast calls for the median home price to go up slightly, reaching $389,500 in 2024, an increase of 0.9% from this year.
With mortgage rates now at 6.6%, the average American family can afford to purchase the median-priced home without allocating more than 30% of its income, a standard threshold for affordability, according to NAR.
At 6.6%, an estimated 4.5 million households will once again be able to afford the median-priced home.
Home sales expected to rise in 2024
As more inventory and slightly lower mortgage rates create more breathing room for buyers, sales of existing homes are expected to go up, according to NAR’s forecast.
Yun forecasts that 4.71 million existing homes will be sold, an increase of about 13.5% from this year, which is projected to end with 4.1 million units sold.
Yun also forecasts a continued increase in new home construction will continue to boost inventory. He predicts there will be 1.48 million housing starts in 2024, including 1.04 million single-family and 440,000 multifamily.
Based on pent-up demand, he said, Austin, Texas, will be the top real estate market to watch.
“Metro markets in southern states will likely outperform others due to faster job increases, while markets in the Midwest will experience gains from being in the most affordable region,” Yun said in a statement.
Other areas where NAR predicts markets will outperform the national average are the following cities: Dallas and Fort Worth, Texas; Dayton, Ohio; Durham and Chapel Hill, North Carolina; Harrisburg, Pennsylvania; Houston; Nashville, Tennessee; Philadelphia; Portland, Maine; and Washington, DC.