2024 Real Estate Forecast: Real Estate Market Update

The 2024 Real Estate Forecast

Housing starts to thaw

After reaching a record peak in May 2022, home values dropped through December, seven straight months of dropping prices. Yet, the inventory of available homes sank to start the year as rates dropped from their end-of-the-year 2022 highs. Home affordability improved slightly as the scarcity of homes available dropped to problematic, low levels, especially in the lower price ranges.

The muted supply overshadowed the affordability predicament, and home values rose throughout 2023, surpassing the May 2022 height. The Federal Reserve raised the Federal Funds Rate from 0 to 4.5% in 2022 and hiked it to 5.5% in 2023. Inflation eased from 6.4% in December 2022 to 3.1% in November 2023. Inflation is trending down, and at this point, the Federal Funds Rate appears too restrictive; thus, the FED indicates that the rate will need to be cut several times in 2024, or they risk slowing the economy too much and potentially causing a recession.

Thus far, the United States economy has been resilient, backed by a very strong labor market, sky-high job openings, low unemployment, and increasing consumer spending. Yet, storm clouds are gathering as consumer savings rates are at their lowest levels since 2009, excess savings from pandemic stimulus checks are running dry, and credit card debt has risen sharply.

As a result, the economy is poised to cool. Mortgage rates drop with a subdued economy. This will result in a hotter housing market. When will housing heat up next year? It depends on when the economy cools. The forecast has three different scenarios: it cools during the spring, summer, or fall. For the sake of this article, we will focus on Scenario 1, with the highest probability for cooling.

Scenario 1 – 50% Chance The Economy Cools During the Spring

· Interest Rates

Look for mortgage rates to drop to between 6% and 6.5% when the economy cools and inflation continues to ease. As the U.S. economy weakens yet does not slip into a deep recession, expect rates to fall below 5% during the year’s second half.

Active Inventory

After starting the year with less than 1,700 homes, the second lowest start to a year since tracking began in 2004, only behind 2022, the inventory crisis will continue. It will reach a low peak of only 2,500 homes during the summer, well below the over 7,000 home peak average before COVID. As mortgage rates improve, the “Hunkering Down” effect, where homeowners opt to stay in their homes due to their underlying fixed low mortgage rates, will diminish. More homes will enter the fray starting in the spring.

Demand

Buyer demand will pick up substantially during the Spring Market. As rates remain below 6.5% with duration, the housing market will heat up, similar to the COVID years between 2020 and the first half of 2022, due to increased affordability. Multiple offers and bidding wars will prevail and buyers will be willing to stretch in price to secure a home.

Closed Sales

The number of successful closed sales will increase by 16% to 23% compared to 2022, with around 24,000 total.

Home Values

Home values will rise between 4% to 7% for the year.

Additionally, the housing market will follow a typical housing cycle. Spring is the strongest in terms of demand, followed by the Summer Market, then the Autumn Market, and finally the Holiday Market. Luxury housing will be sluggish and will continue to transition to normal, longer market times, often taking months to procure a sale. The Spring Market will be the strongest for luxury and become sluggish and susceptible to Wall Street volatility during the year’s second half. Finally, do not expect a wave of foreclosures and short sales. Distressed properties are still far below pre-pandemic levels, and homeowners are sitting on mountains of equity.

The bottom line is that the economy will cool sometime in 2024. When that occurs, rates will drop, and the housing market will heat up. No matter what, there will be more homeowners opting to sell their homes, pending sales will increase and surpass 2023 levels, and there will be more closed sales. How hot the housing market gets in 2024 depends upon when the overall economy downshifts.