Too many factors are at play to predict 2024 housing market outcomes with any certainty. But the housing market is proving to be more resilient than anyone expected, and the likelihood of falling prices has shrunk, according to J.P. Morgan and other firms.
Around this time last year, analysts made dire predictions about a housing correction that could result in up to a 20% decline in prices. Recession fears motivated these forecasts, but many economists now anticipate a soft landing with suppressed, yet positive economic growth in 2024.
The state of the housing market in 2024 mostly hinges on housing affordability and the effect of mortgage rates on housing demand. There’s a chance that 2024 could look very similar to 2023 if mortgage rates hold steady.
Depending on whether you already own rental properties or are looking to break into real estate investing, you may be positively or negatively impacted by 2024 changes to the housing market. You may also experience shifts in your region that are contrary to national trends. In any case, looking ahead at the possible scenarios will enable you to invest strategically.
Following a pandemic boom in homebuying driven by low mortgage rates, stimulus dollars, migration, and millennials becoming homeowners, the Federal Reserve began tightening monetary policy to control inflation. That led to affordability concerns for homeowners in 2022, as high mortgage rates collided with high home prices.
Home sales, therefore, declined as buyers left the market and existing homeowners stayed put. The rate hikes continued into 2023, reaching nearly 7.8% in October before falling over the last month, according to Freddie Mac. Yet the median sale price for existing homes is up 3.4% year over year as of October, according to the Fed, despite declines in the third quarter.
There are a couple of reasons for this. Most homeowners, particularly those who snagged a mortgage when rates were historically low, would experience a mortgage payment spike if they were to move into a new home. That’s one reason for the low supply of existing homes, which has been rising this year but still hasn’t reached pre-pandemic levels.
However, homeowners aren’t just hesitant to move because of high mortgage rates, a Fannie Mae survey found. High home prices are another factor and many respondents just like where they live—which may be in part due to the home remodeling boom that occurred during the pandemic. In any case, the lack of inventory is keeping home prices elevated despite slackening demand.
Meanwhile, new housing starts are down 4.2% year over year as of October, while homebuilder sentiment continues to drop amid high construction costs and homebuyer affordability concerns. There may be fewer people looking to buy, but they’re competing for comparatively few homes for sale. That’s prevented a significant national housing correction, which looked likely, given the rapid increase in home prices during the pandemic.
For the market to change in 2024, there will likely need to be movement in either the supply of homes or the demand for homes. It’s unlikely we’ll see much change on the supply side. Migration away from urban areas appears to be slowing, and existing homeowners aren’t budging.
Research from John Burns Research and Consulting suggests that most homebuyers aren’t willing to purchase at a mortgage rate above 5.5%, with 90% of current borrowers paying less than that. Zillow research shows existing homeowners with a rate below 5% are especially unlikely to have plans to sell, suggesting that rates would have to drop significantly to impact what’s known as the lock-in effect.
It’s also unlikely that new construction will meaningfully add to the available inventory, according to Micah Solit, project director at Project Management Advisors, a real estate consulting firm. “High development costs and high costs of capital have greatly affected the number of new
construction starts this year and have even resulted in projects getting paused,” said Solit in an interview with BiggerPockets. “We anticipate that to persist for most, if not all, of 2024.”
However, an increase in the supply of multifamily buildings in the commercial real estate sector could impact prices in the rental market. As new developments hit the market, Fannie Mae expects vacancies to peak in 2024.
Without a significant price correction, the factor most likely to impact demand is a reduction in mortgage rates. We’re already seeing mortgage applications pick up week over week with the recent modest decline in mortgage rates, according to the latest data from the Mortgage Bankers Association. If rates fall further—especially if they reach 5.5% or below—that will bring mortgage payments into reach for more homebuyers.
Of course, if the Fed opts for a dramatic decrease in rates during 2024, it may be a response to a weakening economy. That could put pressure on incomes and increase homebuyer hesitancy. But it would likely still increase demand, as homebuyers waiting for rates to drop finally make their move, which would put upward pressure on home prices amid a constrained supply.
If inflation persists and the Fed raises rates in 2024, that could push the housing market into a correction, with fewer transactions and declines in home prices, assuming inventory holds steady. But some markets will be more resilient than others. Metros that are unaffordable for a large share of residents will be at risk for the largest drops, and as would-be homeowners turn to rentals, those areas could see strong rent growth.
The uncertainty about mortgage rates is keeping investors standing still, but that could change, according to Solit. “Ideally, investors would like to see a decrease in the federal funds rate, but we feel that if the Fed demonstrates that they’ll at least maintain rates, then investors will adjust to new market conditions and feel more confident about investing and developing,” said Solit.
Geopolitical uncertainty abounds. The ongoing war in Ukraine could further disrupt supply chains and increase food and energy costs, hurting the U.S. economy. If the Israel-Hamas conflict expands regionally, that too could affect oil prices and trigger a downturn in the U.S. Meanwhile, tensions with China and the country’s real estate crisis could impact the U.S. housing market in several ways.
Solit also noted that climate change could impact several regional markets, adding: “This year has underscored the cost effects of climate change on housing more than ever, and we expect that to continue and likely worsen. Insurance costs for housing in regions prone to natural disasters like California and Florida will rise, no matter how desirable those markets are.” Unaffordable or unattainable insurance may cause home price declines in affected areas.
