Affordability, inventory, rates: An economist's 2024 housing outlook

This is the time of the year when I should be thinking about what I am going to buy my family for Christmas, but I’ve been spending all my time wondering what the real estate market will look like in 2024.

1. Still no housing bubble

Some of you may remember that this was number one on my list last year and, so far, my forecast was spot on.

The reason why I’m bringing it to your attention for a second year is because the market actually performed better in 2023 than I had expected. This has led some to suggest that stubbornly high home values – along with significantly higher mortgage rates — are likely to lead the market to implode in 2024, but I find this highly implausible.

2. Mortgage rates will drop, but not quickly

I will be the first to admit that last year’s forecast for rates to have started dropping earlier in 2023 and faster than they have was not accurate.

Why? Well, the U.S. economy proved to be significantly more resilient to the Fed which was raising interest rates at the fastest pace in over 40 years. And this has led the Federal Reserve to keep borrowing rates higher — and likely for longer — as they continue to try and tame inflation.

But the data I’m looking at today shows inflation and the economy in general starting to slow and this leads me to believe that mortgage rates have peaked and that they will continue to ease as we move through 2024.

That said, I don’t see rates dropping below 6 percent by the end of the year. I know, this might sound depressing, but I’d still be far happier with a 6 percent mortgage and today’s rate of close to 7.5 percent. 

3. Listing activity will rise modestly

Last year I suggested that the number of sellers listing their homes in 2023 would be extremely low, and that forecast was correct.

In 2024, I expect that we will see a modest increase in the number of sellers, but many will be hesitant to sell and lose their current mortgage rate which is well below where we are today.

In fact, the most recent data I have shows 80 percent of mortgaged homeowners have a rate at or below 5 percent.

But although they may not be inclined to sell right now, as and when rates fall to within 1 percent to 1.5 percent of the rate they currently hold, I believe that those who had been holding off will look seriously at listing their homes for sale.

4. Home prices will rise, but not much

Most forecasters suggested that sale prices would fall in 2023 but that was not the case. The lack of inventory in the marketplace acted to prop up home values and, as I found it unlikely we would see either a meaningful increase and the number of homes for sale or significantly higher foreclosure activity, I did not expect to see prices drop in 2023 and I am not looking for them to fall in 2024.

However, growth will come in at a very modest 1 percent — lower than has been seen in many years, but growth all the same.

5. Home values in markets that crashed will recover

During the pandemic, there were a number of more affordable markets across the country that experienced very significant price increases, which were followed by significant post-pandemic price declines.

I expected home prices in those areas to take longer to recover than the rest of the nation, but I’ve been surprised by how quickly prices have recovered, with most markets having either matched their historic highs or getting close to it — even in the face of very high borrowing costs.

In 2024, I expect prices to match or exceed their 2022 highs in the vast majority of metropolitan areas across the country.

6. New construction will gain market share

Although new home construction remains tepid, builders are still benefiting from the lack of supply in the resale market and are taking greater market share not only of sales but of listings too.

Now, although this might sound like a big positive for builders, it is coming at a cost.

A recent report published by the National Association of homebuilders suggested that 32 percent of builders have been cutting home prices and 62 percent of them were providing sales incentives such as mortgage rate buy downs.

7. Housing affordability will get worse

Although material costs have softened, it remains very hard for builders to deliver as much housing as is needed by the market.

With home prices not contracting — and the pace of borrowing costs far exceeding income growth — affordability will likely erode further in 2024.

Of course, there are ways that affordability could improve but it would require either a significant drop in home values, a significant drop in mortgage rates, a significant increase in household incomes, or a combination of the three, but I’m afraid that I find this very unlikely.

And the hardest hit due to affordability, or lack of it, will be our younger first-time homebuyers who will continue to find it very challenging when it comes to getting their foot on the first rung of the housing ladder. 

8. Government needs to continue taking housing seriously

In last year’s forecast, I suggested that government, both national and local, would start to take housing in general — and affordability specifically — more seriously and that has certainly been the case with several states enacting new land use policies aimed at releasing developable land.

Naturally, I support these efforts, but I expect even more to be done in 2024.

Specifically, I’m hoping that cities and counties not only continue easing their restrictive land use policies but also continue to streamline the permitting process and take a close look at the fees that are charged to builders.

These costs are passed on directly to the homebuyer which further impacts affordability. More needs to be done and I’m hopeful that many markets across the country will step up to the plate and make some quantifiable changes.

9. Foreclosure activity won’t impact the market

Many expected that the end of forbearance would bring a veritable tsunami of homes to market but they failed to appear. At its peak, almost 1 in 10 homes were in the program but that has fallen to below 1 percent today.

That said, we have seen foreclosure starts to pick back up – although I have to say that they remain well below pre-pandemic levels. 

I expect delinquency levels to continue rising in 2024, but they will simply be returning to the longer term average and are not a cause for concern.

10. Sales will rise but remain the lowest in 15 years

2023 will likely be remembered as the year when sales activity was at its lowest level since 2008 — following the bursting of the housing bubble. As I explained earlier, I believe that we will see the number of existing homes coming to market improve modestly in 2024 which, in concert with mortgage rates starting with a six rather than a seven for most of the year, should allow existing home sales to rise to around 4.4 million.

However, there will still be more demand than supply and this will mean that owners will still have the upper hand in 2024.