TAKEAWAYS
- Home sales activity was down in 2023 due to high mortgage interest rates and the lack of homes available for sale.
- Mortgage rates topped out in October 2023 are we are expecting more stability plus lower rates in 2024.
- Homes available to purchase (supply) in 2023 were far below the buyer demand notwithstanding a decline in such buyer demand for the year.
- Home prices remained high in 2023 due to the lack of inventory, or housing supply.
- Based on the information from December 2023 and January to date, we expect home sales activity to increase in 2024 while mortgage interest rates decline and more homes come to the market.
It’s that time of year again to pull out the crystal ball and try to conjure up a picture of what the real estate market has in store for us in 2024. The real estate world is dynamic and can turn on a dime. And while we don’t really have a crystal ball it’s helpful to examine and digest the available information and try to create a landscape of what we expect to see this year.
First, what happened in 2023 real estate market?
Climbing mortgage interest rates coupled with prices that remained high brought extreme pressure to home affordability in 2023. Only 15% of California households were able to purchase a median priced home in the 3rd quarter; see https://www.prnewswire.com/news-releases/california-housing-affordability-dials-back-to-hit-16-year-nadir-as-interest-rates-surge-to-two-decade-high-in-q3-2023-car-reports-301984891.html . In addition to the affordability issues last year, there was also a severe lack of homes on the market actually available to purchase. Even with a falling buyer demand due to affordability, demand outpaced supply of homes leaving buyers without an opportunity to buy. All of these forces combined to leave us with a sharp reduction of home sales activity in 2023.
What is expected in 2024 real estate market?
The good news is that in 2024, we expect home sales activity to grow. Here’s why:
Affordability and the 2024 real estate market outlook
- Mortgage Rates
Mortgage rates have been in the headlines since their ascent was triggered in the first quarter of 2022 and continued into most of 2023. Prior to this, the Federal Reserve (“the Fed”) had been holding the federal funds rate around 0%. It is important to understand that the federal funds rate does not directly control mortgage interest rates but it certainly impacts them and thus, home affordability.
In March 2022, the Fed launched a battle against inflation, employing a monetary policy of successive rate increases peaking mortgage interest rates to over 8% in mid-October 2023; a 23-year high. See https://www.bankrate.com/real-estate/housing-trends/#what-to-expect .
Fortunately, at the end of 2023, the Fed pivoted toward an era of rate stabilization that is leading to lower rates already with actual federal fund rate cuts coming this year. This will make homes more affordable. Another result is that once rates fall below 6%, homeowners that were unwilling to give up their current lower rate mortgages will be coaxed back to the market to sell their current homes resulting in lower inventory shortages. Expect more stability in mortgage interest rates as well as specific rate cuts.
- Home Prices
As we’ve stated, 2022 through 2023 ushered in declines in buyer demand due to the pressures on home affordability. While many may have expected home prices to fall in 2023 because of that drop in demand; however, most markets experienced strongly supported home prices due to the lack of available inventory. The expectation for 2024 is that home prices will continue to rise but at a manageable pace. In December 2023, Lawrence Yun, chief economist for the National Association of Realtors (“NAR”) predicted a 3-4% price increase in 2024.
Inventory and the 2024 real estate market outlook
Housing inventory has been a major concern since the pull back in new home construction during the Great Recession beginning in 2007. This shortage was exacerbated in 2023 by the fact that, as discussed above, many homeowners have been staying put these days in order to protect their low mortgage rates.
The good news is that the number of available homes (inventory) is higher to date in January 2024 versus 2023. Case in point: combined homes active on the market in the Beach Cities of the South Bay Real Estate Market (Manhattan Beach, Hermosa Beach, and Redondo Beach) as of January 15, 2024 is 2.8% higher as compared to 1/15/23.
The expectation is that this inventory will continue to be higher throughout the year. In fact, Yun goes so far as to predict a 30% increase in inventory in 2024. See https://www.nar.realtor/newsroom/in-the-news/mortgage-rate-forecasts-for-2024-signal-a-comeback-for-real-estate-forbes#:~:text=Lower%20mortgage%20rates%20in%202024,on%20the%20market%2C%20Yun%20said. As mortgage interest rates start to come down in 2024, homeowners will be more open to selling causing the housing inventory shortage to ease. New construction has also been on the rise further contributing to an uptick in housing supply. However, we do not expect to “catch up” to the needed housing inventory levels this year so, low inventory will continue to be an issue in our future real estate market. But, we expect to remain in strong sellers markets in our area especially as demand heats back up when mortgage rates drop.
Home sales activity and the 2024 real estate market outlook
Because of these expected positive changes in 2024, Yun (at NAR) says that, “We foresee 5.5 million combined new and existing home sales in 2024, up from 4.8 million in 2023.”
Timing and the 2024 real estate market outlook
The biggest question is at what point in the new year do these changes in mortgage rates, inventory and affordability impact the market? The sooner these changes provide relief, the sooner the real estate market will begin to shift. We hope to see improvements early but if it takes longer, say until the 2nd quarter of 2024, we might see a late selling season, shifting from Spring to Summer or Fall. Such a shift would be similar to 2020 when the pandemic disrupted the earlier part of the year and pushed many sales to the 2 last quarters of the year. A shift occurring later in the year has the potential to dampen the total expected improvements in 2024 real estate activity.
What spoilers should we be aware of now?
Soft Landing Disappears
More than 50% of economists now expect a “soft landing” in 2024 for the US economy. See https://www.cnbc.com/2023/12/26/the-us-avoided-a-recession-in-2023-whats-the-outlook-for-2024.html#:~:text=Bank%20of%20America%20is%20predicting,National%20Association%20for%20Business%20Economics. However, many world events, governmental policy shifts, and the like can impact our market and the larger economy as a whole. If the “soft landing” that the Fed has been trying to navigate disappears, this landscape will shift.
Turmoil in the Middle East
We are keeping an eye on the attacks on merchant vessels and rising tensions in the Red Sea. Extended tensions will add costs to supplies as well as delay deliveries of goods. This can easily impact building costs and timing as well as inflation in general. New construction has been providing some relief to the lack of existing home sales but shipping difficulties has the power to drastically alter such contribution to housing availability further straining the market.
US Elections
2024 is an election year which brings uncertainty into our lives. While this is not expected to truly impact the market as a whole, uncertainty may quiet some of the expected home sales activity.
In conclusion
We are optimistic for a more vibrant and more affordable 2024 real estate market. This is good news for both sellers and buyers. Buyers may be well served to get an early jump on the market in order to buy before the demand heats up. Sellers will want to time the market as much as possible given their situation. Are you ready to navigate the 2024 real estate market? Contact Team Plunkett whether you are thinking of buying, selling, or both!
