(CNN) — The real estate economists who made predictions were wrong about 2023.
Few thought home sales would collapse like they have this year, plunging about 17% from a peak in February to a low in October, according to the National Association of Realtors (NAR).
Most thought home prices wouldn’t rise much. However, prices have reached record highs this year, rising 7% year-to-date and are now 1% higher than their 2022 peak, according to Case Shiller.
And virtually no one was predicting mortgage rates close to 8%. When the average 30-year fixed-rate mortgage hit 7.79% in late October, it was the highest level in 23 years, according to Freddie Mac.
All of this has combined to create the least affordable housing market in a generation. Sales of existing homes fell below 4 million units, reaching levels last seen in 2010. However, even with fewer buyers, home prices continued to rise because there were not enough homes on the market and the competition has driven up prices.
Will this outlook improve in 2024? What should homebuyers expect next year?
“Earlier this year, I called 2023 the year of disappointment,” said Jonathan Miller, president and CEO of Miller Samuel Real Estate Appraisers and Consultants. “I call this year ‘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 little sudden movement.
For tired homebuyers fearful of big swings and sudden market jolts, it could be a welcome change of pace.
Rates are expected to drop slightly
Mortgage rates have already fallen for nine consecutive weeks and are expected to fall further in 2024, although they are unlikely to fall below 6%.
The average rate on a 30-year fixed-rate mortgage fell nearly a percentage point this year, hitting 6.61% in the last week of December.
The Federal Reserve’s historic campaign to control inflation by raising interest rates has had a major impact on the housing market, cutting demand as rates rise and pushing potential homebuyers out of the market.
“Rising mortgage rates in 2022 and 2023 were perhaps the biggest reason the housing market remained stuck in neutral,” said Skylar Olsen, chief economist at Zillow. “The recent decline in mortgage rates has spurred greater activity.”
Rates in the 3% range seen in 2020 and 2021 will not return, he said, “at least without another economic crisis which we do not want and should not expect.”
However, he said, “a slow and steady decline – or even holding rates stable – in 2024 would be a welcome break after a relentless and unpredictable rise over the past two years.”
Realtor.com expects mortgage rates to average around 6.8% through 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 Federal Reserve will cut rates four times. This could calm inflationary conditions, in response to the slowdown in economic activity.
Accessibility will improve slightly
In October, a typical home buyer would have spent more than 40% of their income paying off their mortgage. That’s an all-time high, according to Zillow data, which dates back to the 1990s.
As mortgage rates fall slightly in the new year and more homeowners who have kept their mortgage rates ultra-low see the gap between their current rate and the current mortgage rate narrow, more homeowners will put their homes on the market.
This will bring more inventory to the market, allowing prices to fall slightly in some markets and stop rising in others.
But anyone holding their breath at the prospect of a sharp drop in house prices might become gloomy.
Zillow’s latest forecast calls for home values to remain stable in 2024, falling just 0.2% by the end of the year. Realtor.com forecasts call for home prices to fall further, falling 1.7% in 2024 from this year.
NAR’s latest forecast estimates that the median home price will increase 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 a median-priced home without spending more than 30% of their income, a standard affordability threshold, according to NAR.
It is estimated that with 6.6%, 4.5 million households will once again be able to afford an average-priced home.
Home sales are expected to increase in 2024
As higher inventory and slightly lower mortgage rates create more room for buyers, existing home sales are expected to increase, NAR forecasts.
Yun predicts 4.71 million existing homes will be sold, an increase of about 13.5% from this year, which is expected to end with 4.1 million units sold.
Yun also expects a continued increase in new home construction to continue to boost inventories. There are expected to be 1.48 million housing starts in 2024, including 1.04 million single-family homes and 440,000 multifamily homes.
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 thanks to faster job gains, while Midwest markets will see gains from being in the most affordable region,” Yun said in a note.
Other areas where NAR expects markets to outperform the national average include 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.
2023-12-31 22:09:00
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