NAR Market Forecast Pent-up Housing Demand

By National Association of REALTORS® Research Group

End-of-year recap
2023: The “bottom-out” year

This year has left many people feeling disappointed. After a year marked by a market slowdown, anticipation was high that 2023 would usher in a turning point for both the economy and the housing market. Nevertheless, despite a cooling inflationary environment, the economy faced additional challenges as the Federal Reserve implemented multiple interest-rate hikes throughout 2023. These rate increases-amounting to a cumulative one percentage point exerted further pressure on every kind of borrowing.

Consequently, mortgage rates surpassed the 7.5 percent threshold for the first time after 23 years, pushing down housing affordability to record lows. While consumer prices continue to increase fast, Americans must spend more than 30% of their income to purchase a home. Buyers must earn over $110,000 if they don’t want to exceed their budget. In the meantime, the challenges for potential first-time buyers extend beyond mortgage rates as rents continue to rise. This exacerbates difficulties in saving for a down payment, particularly considering that one in two renters already faces cost burdens.

With many buyers forced out of the market, the housing market continued its second consecutive year of slowdown in 2023. Existing-home sales dipped below the 4-million-unit mark, reaching levels last seen in 2010. However, despite a reduced number of buyers, home prices kept increasing. The reason is obvious: there simply weren’t enough homes available for sale. Although housing inventory rose to above the 1.1 million homes available for sale in 2023, data shows that these additional homes weren’t enough to accommodate housing demand, albeit lower than the previous year.

But this isn’t a new issue. The current housing shortfall has been accumulating over decades. After the mid2000s housing boom, the U.S. has consistently underbuilt compared to the historical average. Furthermore, with mortgage rates hovering around 7 percent for most of the year, fewer homeowners opted to list their homes in 2023. This rate is nearly 1.7 percentage points higher than the average rate in 2022. Consequently, this longstanding under building issue and the rate lock-in effect continued to keep housing inventory low throughout the year.

Outlook
2024: A better year for homebuyers

Following two years of subdued activity, the housing market is expected to grow in 2024. Several signs point to an imminent market recovery.

Firstly, the Federal Reserve has halted its interest rate hikes. Although interest rates continue to be substantially higher than pre-pandemic, the Federal Reserve hasn’t raised its rates since last August. In the meantime, history shows that inflation and interest rates tend to move in the same direction but with lags. Central banks usually lower interest rates when inflation falls to stimulate the economy. But, while inflation has been moving down since August 2022, interest rates have yet to follow the same downward trajectory. Thus, if inflation continues its downward trend, rates may start moving down as soon as in the first quarter of 2024.

But lower interest rates translate to lower mortgage rates. Mortgage rates have potentially peaked in 2023. After reaching 7.8 percent in the last week of October, rates are finally moving down. Even though mortgage rates continue to be notably higher than the previous years, every 0.2 percent decrease in mortgage rates enables approximately 950,000 households to re-enter the home-buying market. Thus, the decline in mortgage rates is expected to draw more buyers, including those returning to the market, consequently bolstering demand for housing. Data shows that with rates near 6.6 percent, the average American family can afford to purchase the median-priced home without allocating more than 30 percent of its income. Are rates going to move down that low in 2024? Yes, the National Association of REALTORS® expects rates to approach that level sometime in the second half of 2024. If this happens, it is estimated that nearly 4.5 million households will once again be able to afford the median priced home.

These lower mortgage rates will also ease the rate lock-in effect by enticing more existing homeowners to reenter the market and list their homes. These pent-up sellers are expected to increase inventory next year. In addition, single family construction is poised to grow after experiencing a few years of decline. Nevertheless, even with this increase, the housing supply will continue to remain tight in 2024, further fueling home price appreciation.

Copyright NATIONAL ASSOCIATION OF REALTORS®. Reprinted with permission.