As we step into 2024, let's dive deep into the nuances of the U.S. Real Estate and Mortgage Markets. This year promises a blend of challenges and opportunities, shaped significantly by the Federal Reserve's actions and broader economic trends.
Reflecting on 2023: A Year of Unexpected Strength
Last year's market dynamics were quite a revelation. While I had anticipated a mild recession, predicting a decrease in mortgage rates to possibly the low 6% or high 5% range, the reality was quite different. The economy showed unexpected robustness with a stronger-than-anticipated growth in GDP, a resilient job market, and sustained consumer spending. This led to an unforeseen spike in mortgage rates, touching the high 7% range, and in some scenarios, even hitting 8%.
Interest Rates: A Complex Scenario
Recent Trends: The peak in mortgage interest rates occurred in October 2023 at 7.79% (according to Freddie Mac) and 8.01% (Bankrate), but they have since receded to below 7% (6.69% as of late January 2024, per Freddie Mac).
10-Year Treasury Influence: The 10-year Treasury, a critical benchmark for mortgage rates, has come down from a peak of over 5% in October 2023 to around 3.92% currently. The historical spread between this and the 30-year mortgage rate has been roughly 1.7% over the last 50 years. However, in the last year, this spread has widened to approximately 2.7-3%, primarily due to the Federal Reserve's exit from the Mortgage Backed Securities market, a move that reduced the liquidity in the market and demanded higher spreads.
Predictions for 2024: With anticipated Fed rate cuts, a continued drop in the 10-year Treasury yield is expected, although we are likely to face resistance at the lower end of about 3.25%. The early predictions of rate cuts starting in March have been pushed back, with the focus now on the May meeting. This delay is influenced by the continued strength in the economy and the labor market. Consequently, I foresee some volatility in the 10-year Treasury yield, with 4.25% being the upper end of the range. This could mean that the 30-year fixed rates might hover in the mid to high 6% range to the low 7% for the first quarter, potentially dropping to the lower 6% or high 5% by year-end.
Home Prices: Stability Amidst Changes
2023 Performance: Defying predictions of a market crash, home prices saw an increase of almost 3%, with the national median home price settling at $415,000. The percentage of homes offering price cuts was in line with historical norms, where about 30-35% of homes experienced price cuts.
2024 Outlook: The consensus initial predictions of a fall in home prices for 2024 have been revised due to the end-of-year drop in mortgage rates. I am anticipating a growth in home prices, potentially over 5%. This growth will vary across different markets, as real estate trends are inherently local.
Inventory Challenges Persist
Existing Home Sales Trends: Starting from 6.5 million in January 2022, existing home sales fell to about 4 million by the year's end. For 2023, the figure was around 4.1M. The inventory finished December at 1 million units, significantly lower than the over 4 million in 2007 and about 2.3 million at its peak in 2014.
Homeowner Reluctance: A significant factor in the inventory shortage is the large proportion of homeowners (approximately 70%) with mortgage interest rates below 4%, making them reluctant to move to higher rates. Additionally, demographic trends, such as baby boomers opting to stay in place, are contributing to the low inventory.
Inflation and Recession: A Balancing Act
Inflation Trends: The Fed's favorite inflation measure, the Personal Consumption Expenditures (PCE), shows signs of cooling, with the core rate at 2.9% on a 12-month basis, based on last weeks report. The 3 month and 6 month figures were both below the 2% target. GDP inflation figures reported last week also came in at the 2% growth target.
Recession Possibilities: The consensus in 2023 was leaning towards a recession in the latter half of the year. My perspective, influenced by the strength of the labor market, was leaning towards a 'soft landing'. However, with the general consensus now aligned with this view, there's an inherent risk of the opposite occurring, especially if the Fed persists with its higher for longer rate strategy.
Advice for Homeowners and Homebuyers
Current Market Dynamics: For those looking to buy, the market offers unique opportunities with sellers and builders providing concessions. However, any significant drop in rates within the next 12 months could lead to increased demand, thereby reducing these incentives.
Potential Recession Impact: A recession could lead to more drastic rate cuts by the Fed, affecting both market dynamics and individual strategies.
Looking Forward: A Gradual Return to Normalcy
Sales Projections: I expect existing home sales to be closer to the 4.5-4.75 million level. A key factor will be an increase in inventory to meet the persistent buyer demand.
Market Health: As rates stabilize, possibly returning to the high 5% levels, I anticipate more sellers entering the market, gradually restoring balance and health to the housing market. This sets the stage for a more robust market in 2024, paving the way for an even better 2025.
As we navigate these times, I am committed to providing you with detailed, insightful analyses to guide your decisions in the real estate market. Here's to a successful year ahead!
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