The 2023 housing market was profoundly impacted by a singular phrase – the “mortgage rate lock in effect,” a phenomenon that brought the industry to a halt, influencing everything from inventory levels to home sales. The sub-5% mortgage interest rates, a relic from the pandemic era, became a stronghold for 85% of current mortgage holders, dissuading them from selling their homes and engaging in transactions at elevated interest rates that peaked at 7.79% in the week ending Oct. 26, according to Freddie Mac.
However, signs suggest that market conditions might undergo improvements in the coming year. Over the past seven weeks, mortgage rates have steadily declined, averaging 6.61% for a 30-year fixed mortgage by the week ending Dec. 28. The decrease in mortgage rates provided a boost to existing-home sales, growing 0.8% in November from October, breaking a five-month streak of declines, according to the National Association of Realtors (NAR). While year-over-year sales fell by 7.3%, NAR Chief Economist Lawrence Yun anticipates a marked turn with the recent plunge in mortgage rates.
Despite this positive momentum, one critical aspect is expected to persist – the shortage of homes for sale. Danielle Hale, chief economist for Realtor.com, anticipates that households will have more options in 2024 due to a slight uptick in single-family home construction and the completion of numerous multi-family units, primarily destined to be rental homes. However, the additional inventory is not projected to completely address the long-running shortage, keeping the housing market structurally undersupplied.
Rising mortgage rates have also contributed to builders slowing down production. Odeta Kushi, deputy chief economist at First American, notes that builders can now focus on reducing the backlog of homes already under construction. Nevertheless, even with these homes entering the market eventually, the housing market is expected to remain structurally undersupplied.
Home price growth is another factor that will vary across different markets. While nationwide sales are predicted to see a modest uptick in 2024, real estate activity will differ significantly from one market to another. Some top-growth areas, particularly affordable markets in the Midwest and Northeast like Toledo, Ohio, and Rochester, New York, are expected to experience double-digit increases. Additionally, Southern California, which faced a slow 2023, might witness a rebound due to a reduction in mortgage rates.
In November, the median existing-home price for all housing types was $387,600, a 4% increase from November 2022 ($372,700). All four U.S. regions posted price increases. Yun emphasizes that unless there is a dramatic rise in supply, home prices are likely to continue their upward trajectory.
The dynamics of the mortgage rate lock in effect have undoubtedly shaped the housing market in 2023, and as the industry braces for 2024, the interplay between mortgage rates, inventory levels, and regional variations will continue to define the real estate landscape in the coming year.