As the 2024 real estate market comes into view, there’s much for which to be thankful. Despite steep interest rates, little residential inventory, and falling sales, 2023 stood up fairly well. Indeed, it may provide a solid basis for the coming 12 months given that in the past year inflation cooled, home prices rose, and a new option may help offset the housing shortage.
Appreciation, Affordability, and Reality
According to ATTOM, single-family homes and condo prices fell slightly between June ($349,900) and October ($345,000). However, it is also true that home prices increased by more than $42,000 between January ($302,500) and October ($345,000). Unit sales were down 14.6% from a year earlier as of October, the slowest existing home sales since August 2010, according to the National Association of Home Builders.
So, was the real estate glass half full or half empty in 2023? And what about 2024?
Real estate prices give us some idea of how we’re doing. Higher values are good for net worth, the ability to borrow, and owner bragging rights. But the reality is that we tend to hold onto real estate and refinance infrequently. If you look at the longer term, say the past few years, you get a better view of what’s really happening.
For example, National Association of Realtors (NAR) says existing home prices rose 9% in 2019, 12.9% in 2020, 15.4% in 2021, and 10.22% in 2022.
Such huge price increases over the past five years are wonderful for owners but make purchasing difficult or impossible for millions of would-be buyers. Worse, incomes have not only failed to keep up with rising prices, but they’ve also declined. According to the Census Bureau, real median household income went from $76,330 in 2021 to $74,580 in 2022, a 2.3% drop.
The affordability problems seen in 2023 are likely to continue because higher prices mean bigger monthly payments and incomes have not kept up. As Redfin pointed out in October, “A homebuyer must earn $114,627 to afford the median-priced U.S. home, up 15% ($15,285) from a year ago and up more than 50% since the start of the pandemic. That’s the highest annual income necessary to afford a home on record.”
We’re Winning the War on Inflation. Maybe.
The economy — and real estate — continue to be dominated by the fight against Covid-19 and the inflation that followed.
To fend off an outright economic collapse — the unemployment rate went from 3.5% in February 2020 to 14.7% in April of that year — the government spent more than $5 trillion for specialized Covid programs. The money was used to fund businesses, hospitals, taxpayer rebate plans, the unemployed, vaccine development, and state and local governments.
Not only did Covid-related money pour into the economy, but with few places to eat, shop, or travel — and with a lot of marketplace uncertainty — households and businesses set aside enormous sums. US commercial bank deposits increased from $3.8 trillion in January 2020 to $17.4 trillion in September 2023.
Real estate prices soared as buyers financed rising prices with ultra-cheap mortgages, worked from home, and hoped to avoid the virus. US mortgage rates reached 2.65% in January 2021, the all-time low. There was little available inventory, and residential bidding wars were common.
Real estate wasn’t the only sector to see rising prices. A massive chip shortage, supply-chain disruptions, ships backed up off the California coast, and other unusual conditions all contributed to supply issues and higher costs. A prime example: 40,000 Ford vehicles could not be completed because of a semiconductor shortage.
The Federal Reserve has long-favored 2% inflation. That’s enough to spark current consumer buying (because prices are likely to be higher next year if you don’t buy now) but not enough to overheat the economy. So, to lower inflation levels, the Fed raised the federal funds rate – the money banks pay to borrow overnight — 11 times between March 2022 and September 2023.
While the Fed does not directly set mortgage rates, changes in the federal funds rate ultimately pressure mortgage rates up or down. In this case, the 11 Fed changes increased the federal funds rate from 0.25% to 5.5%. During the same period, mortgage rates grew from 4.67% in March 2022 to 7.44% in late October, according to Freddie Mac.
Any major Fed policy stirs debate, and that’s surely the case with its efforts to stem inflation. Did it start too late? Should it have stopped the federal funds rate increases earlier? Could it set off a recession with additional rate hikes?
One idea – and perhaps the fastest way to knock down inflation levels – is to encourage lower mortgage rates. That would mean no more Fed rate hikes and maybe reductions in 2024.
Mortgage costs impact ownership outlays for massive numbers of owner-occupied and investor properties. They limit first-time buyers if mortgage rates are high and help if they are low. Unfortunately, shelter expenses are a major reason recent inflation levels are up. According to the Bureau of Labor Statistics, in September, “the index for all items less food and energy rose 4.1 percent over the past 12 months. The shelter index increased 7.2 percent over the last year, accounting for over 70 percent of the total increase in all items less food and energy.”
Translation: Housing costs are a big part of the inflation index, and mortgage rates are central to real estate economics.
Speaking in November, Federal Reserve Chairman Jerome Powell told the International Monetary Fund that the Fed “is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2 percent over time; we are not confident that we have achieved such a stance. We know that ongoing progress toward our 2 percent goal is not assured: Inflation has given us a few head fakes. If it becomes appropriate to tighten policy further, we will not hesitate to do so.”
Not everyone agrees. Some believe additional rate increases are unnecessary and could produce a recession. As Paul Krugman, an economist and Nobel Prize winner, wrote in The New York Times, “I’m hearing growing buzz, both from economists and from business people, to the effect that the Federal Reserve — which clearly kept its foot on the gas too long last year — is now braking too hard in compensation. And the risks of an accident are growing.”
Look for the Fed debate to continue into 2024. The best case would include lower mortgage rates, less inflation, and no recession, a so-called soft landing.
Will The Inventory Problem Persist?
To have more sales it helps to have more to sell, but that’s not happening in the housing market. Zillow reported that September inventories were 10% lower than a year ago and 40% below 2019 levels. Freddie Mac estimated in 2021 that we had a shortage of 3.8 million units – a shortage which likely has gotten worse as a result of rising prices.
There’s little doubt that the inventory shortage will continue in 2024 and that means a lot of pressure to push prices higher. So why aren’t there more homes to sell?
First, if you have an existing home today the odds are pretty good that you have cheap financing, financing you will lose by selling. In other words, millions of owners are not willing to move and lose the financing of a lifetime.
“Roughly four in five homeowners with mortgages have an interest rate below 5%, and nearly one-quarter have a rate below 3%,” said Redfin in June. “With rates now close to 7%, many homeowners aren’t moving, which is intensifying a shortage of homes for sale.”
As this is written, typical mortgage rates are above 7%, making home sales even less attractive for those with bargain financing in place.
Second, the lack of existing properties for purchase is helping new home sales. As the National Association of Home Builders has pointed out, “Despite mortgage rates that are at a 23-year-high, new home sales posted a double-digit percentage gain in September because of a lack of inventory in the resale market.”
Third, regardless of demand, there are only so many new homes that can be built because few workers are available. The industry had 431,000 job openings in September. Low unemployment rates have created new opportunities for workers who might have gone into construction but can now get jobs that offer steady work and better benefits.
Is there anything in the cards to suggest that inventories will significantly increase in 2024? One option is likely to stand out, the continuing effort to end single-family zoning. Several states and local governments have already overturned such rules, and more may follow suit. The result will be more accessory development units (ADUs) — small, independent living spaces placed on underused lots or within existing homes.
Freddie Mac estimates that there were 1.4 million ADUs in 2020, a number that will surely climb as single-family zoning limits continue to be repealed. Properties with one or more ADU units can add to the housing supply, and they can also change real estate economics. That’s because ADU income can be used to qualify for purchase financing under new FHA guidelines, a change that will no doubt spread to other loan programs.
