Looking ahead to 2024, we see a mix of continuity and change in the housing market and economy. Against modest economic growth, slightly higher unemployment, and easing inflation, longer-term interest rates, including mortgage rates, begin a slow retreat. The shift from climbing to falling mortgage rates improves housing affordability but saps some of the urgency home shoppers had previously sensed. Less frenzied housing demand and plenty of rental home options keep home sales relatively stable at low levels in 2024, helping prices adjust slightly lower even as the number of for-sale homes dwindles.
Home Prices Dip, Improving Affordability
Home prices grew at a double-digit annual clip for the better part of two years, spanning the second half of 2020 through 2022, a notable burst following a growing streak that spanned back to 2012. As mortgage rates climbed, home price growth flatlined, declining annually in early 2023 before an early-year dip in mortgage rates spurred enough buyer demand to reignite competition for still-limited inventory. Home prices began to climb again, and while they did not reach a new monthly peak, on average for the year, we expect that the 2023 median home price will slightly exceed the 2022 annual median.
Nevertheless, even during the brief period when prices eased, using a mortgage to buy a home remained expensive. Since May 2022, purchasing the typical for-sale home listing at the prevailing rate for a 30-year fixed-rate mortgage with a 20% down payment meant forking over a quarter or more of the typical household paycheck. In fact, in October 2023, it required 39% of the typical household income, and this share is expected to average 36.7% for the entire calendar year in 2023. This figure typically ranges around 21%, which is well above the historical average. We expect that the return to pricing in line with financing costs will begin in 2024, and home prices, mortgage rates, and income growth will each contribute to the improvement. Home prices are expected to ease slightly, dropping less than 2% for the year on average. Combined with lower mortgage rates and income growth, this will improve the home purchase mortgage payment share relative to median income to an average of 34.9% in 2024, with the share slipping under 30% by the end of the year.
Home Sales Barely Budge Above 2023’s Likely Record Low
After soaring during the pandemic, existing home sales were weighed down in the latter half of 2022 as mortgage rates took off, climbing from just over 3% at the start of the year to a peak of more than 7% in the fourth quarter. The reprieve in mortgage rates in early 2023, when they dipped to around 6%, brought some life to home sales. Still, the renewed climb of mortgage rates has again exerted significant pressure on home sales, exacerbated by the fact that a greater number of households bought homes over the past few years. Despite stories of pandemic purchase regret, for the most part, these homeowners continue to be happy in their homes.
When homeowners were asked why they are not planning to sell their homes, they don’t need to; concern about losing an existing low-rate mortgage is the top financial concern cited. Our current projection is for 2023 home sales to tally just over 4 million, a dip of 19% over the 2022 5 million total.
With many of the same forces heading into 2024, the housing chill will continue, with sales expected to remain unchanged at just over 4 million. Although mortgage rates are expected to ease throughout the year, the continuation of high costs will mean that existing homeowners will have a very high threshold for moving, with many likely choosing to stay in place. Moves of necessity–for job changes, family situation changes, and downsizing to a more affordable market–will likely drive home sales in 2024.
Shoppers Find Even Fewer Existing Homes For Sale
Even before the pandemic, housing inventory was on a slow downward trajectory. Insufficient building meant that the supply of houses did not keep up with the household formation and left little slack in the housing market. Both homeowner and rental vacancy remain below historic averages. In contrast with the existing home market, which remains sluggish, builders have been catching up, with construction remaining near pre-pandemic highs for single-family and hitting record levels for multi-family.
Despite this, the lack of excess capacity in housing has been painfully evident in the for-sale home market. The number of existing homes on the market has dwindled. With home sales activity to continue at a relatively low pace, the number of unsold homes on the market is also expected to remain low. Although mortgage rates are expected to begin to ease, they are expected to exceed 6.5% for the calendar year. This means that the lock-in effect, in which the gap between market mortgage rates and the mortgage rates existing homeowners enjoy on their outstanding mortgage, will remain a factor. Roughly two-thirds of outstanding mortgages are under 4%, and over 90% have a rate less than 6%.
Rental Supply Outpaces Demand to Drive Mild Further Decline in Rents
After almost a full year of double-digit rent growth between mid-2021 and mid-2022, the rental market has finally cooled, as evidenced by the year-over-year decline in May 2023. In 2024, we expect the rental market to closely resemble the dynamics witnessed in 2023, as the tug of war between supply and demand results in a mild annual decline of -0.2% in the median asking rent.
New multi-family supply will continue to be a key element shaping the 2024 rental market. In the third quarter of 2023, the annual pace of newly completed multi-family homes stood at 385,
000 units. Although absorption rates remained elevated in the second quarter, especially at lower price points, the rental vacancy rate peaked at 6.6% in the third quarter. This uptick in rental vacancy suggests the recent supply has outpaced demand, but context is important. After recent gains, the rental vacancy rate is on par with its level right before the onset of the pandemic in early 2020, still below its 7.2% average from 2013 to 2019. The strong construction pipeline–which hit a record high for units under construction this summer–is expected to continue fueling rental supply growth in 2024, pushing rental vacancy back toward its long-run average.
While the surge in new multi-family supply gives renters options, the sheer number of renters will minimize the potential price impact. The median asking rent in 2024 is expected to drop only slightly below its 2023 level. Renting is expected to continue to be a more budget-friendly option than buying in most markets, even though home prices and mortgage rates are both expected to dip, helping pull the purchase market down slightly from record unaffordability.
Young adult renters who lack the benefit of historically high home equity to tap into for a home purchase will continue to find the housing market challenging. Specifically, as many Millennials age past first-time home buying age and more Gen Z approach these years, the current housing landscape is likely to keep these households in the rental market for a longer period as they work to save up more money for the growing down payment needed to buy a first home. This trend is expected to sustain robust demand for rental properties. Consequently, we anticipate rental markets favored by young adults, including a mix of affordable areas and tech-heavy job markets in the South, Midwest, and West, will be rental markets to watch in 2024.
- Wildcard 1: Mortgage Rates
With both mortgage rates and home prices expected to turn the corner in 2024, record-high unaffordability will become a thing of the past, though, as noted above, the return to normal won’t be accomplished within the year. This prediction hinges on the expectation that inflation will continue to subside, enabling the recent declines in longer-term interest rates to continue. If inflation saw a surprise resurgence, this forecast aspect would change, and home sales could slip lower instead of steadying.
- Wildcard 2: Geopolitics
In our forecast for 2023, we cited the risk of geopolitical instability on trade and energy costs as something to watch. In addition to Russia’s ongoing war in Ukraine, instability in the Middle East has not only had a catastrophic human toll, but both conflicts have the potential to impact the economic outlook in ways that cannot be fully anticipated.
- Wildcard 3: Domestic Politics: 2024 Elections
In 2020, many Americans were on the move amid the upheaval of pandemic-era adaptations. We noted that Realtor.com traffic patterns indicated that home shoppers in very traditionally ‘blue’ or Democratic areas were tending to look for homes in markets where voters have more typically voted ‘red’ or Republican. While consumers also reported preferring to live in locations where their political views align with the majority, few reported wanting to move for this reason alone.
What will the market be like for homebuyers, especially first-time homebuyers?
First-time homebuyers will continue to face a challenging housing market in 2024, but there are some green shoots. The record-high share of income required to purchase the median-priced home is expected to decline as mortgage rates ease, home prices soften, and incomes grow. In 2023, we expect that for the year as a whole, the monthly cost of financing the typical for-sale home will average more than $2,240, a nearly 20% increase over the mortgage payment in 2022, and roughly double the typical payment for buyers in 2020. This amounted to a whopping nearly 37% of the typical household income. In 2024, as modest price declines take hold and mortgage rates dip, the typical purchase cost is expected to slip to just under $2,200, which would amount to nearly 35% of income. While far higher than historically average, this is a significant first step in a buyer-friendly direction.
How can homebuyers prepare?
Homebuyers can prepare for this year’s housing market by getting financially ready. Buyers can use a home affordability calculator to translate their income and savings into a home price range. And shoppers can pressure test the results by using a mortgage calculator to consider different down payment, price, and loan scenarios to see how their monthly costs would be impacted. Working with a lender can help potential buyers explore different loan products such as FHA or VA loans that may offer lower mortgage interest rates or more flexible credit criteria.
Although prices are anticipated to fall in 2024, housing costs remain high, and a down payment can be a big obstacle for buyers. Recent research shows that the typical down payment on a home reached a record high of $30,000. To make it easier to cobble together a down payment, shoppers can access information about down payment assistance options and in the monthly payment section of home listing pages. Furthermore, home shoppers can explore loan products geared toward helping families access homeownership by enabling down payments as low as 3.5% in the case of FHA loans and 0% in the case of VA loans.
What will the market be like for home sellers?
Home sellers will likely face more competition from builders than from other sellers in 2024. Because builders continue to maintain supply and adapt to market conditions, they are increasingly focused on lower-priced homes and willing to make price adjustments when needed. As a result, potential sellers will want to consider the landscape for new construction housing in their markets and any implications for pricing and marketing before listing their homes for sale.
What will the market be like for renters?
In 2024, renting is expected to continue to be a more cost-effective option than buying in the short term, even though we anticipate the advantage of renting to diminish as home prices and mortgage rates decline.
However, for those considering pursuing long-term equity through homeownership, it’s essential to stay alert about market trends and carefully consider the intended duration of residence in their next home. When home prices rise rapidly, as they did during the pandemic, the higher cost of purchasing a home may break even with the cost of renting in as little as three years. Generally, it takes longer to reach the breakeven point, typically within a 5 to 7-year timeframe. Importantly, when home prices are falling, and rents are also declining, as is expected to be the case in 2024, it can take longer to recoup some of the higher costs of buying a home. Individuals using Rent vs. Buy Calculator can thoroughly evaluate the costs and benefits of renting versus buying over time and how many years current market trends suggest it will take before buying is the better financial decision. This comprehensive tool can provide insights tailored to a household’s specific rent versus buying decision and empowers consumers to consider the optimal choice for the current month and how the trade-offs have evolved over several years.
In the dynamic and ever-evolving landscape of the housing market, finding a reliable partner is essential to ensure a smooth and successful journey. At Modern & Main Real Estate, we pride ourselves on being your trusted ally in navigating the intricacies of real estate. Our team is dedicated to understanding your unique needs and guiding you through the process with expertise and professionalism. Whether you’re a first-time buyer, looking to sell, or searching for your dream home, we’re here to make the experience seamless and rewarding. Don’t hesitate to reach out to us for more information and discover how Modern & Main Real Estate can turn your housing aspirations into reality. Your next chapter begins with us.