Executive Summary

Following a continued slowdown in the housing market characterized by low inventory and dwindling activity, there is renewed optimism for 2024. The National Association of Home Builders (NAHB) predicts that the housing market will experience a revival in 2024, with housing construction and demand presenting signs of improvement. This brief will explore the broader implications of the US housing market recovery predictions for 2024.

Overview

A. Pointed Summary

• US Housing Market Recovery
• Surge in Housing Demand
• Lowered Mortgage Rates

B. Relevance

Homebuilder sentiment is on the rise due to decreasing mortgage rates and improved building conditions. With thirty-year fixed mortgage rates declining to an all-time low since May 2023 and expected to continue, the NAHB/Wells Fargo Housing Market Index, which measures sentiment index has experienced a significant increase. Good sentiment indicates that more builders anticipate favorable conditions for new construction activities. 
The limited inventory of existing homes can be attributed to the reluctance of potential sellers to enter the market due to high mortgage rates. After experiencing a 4% plummet in October, there was a 0.8% uptick in existing home sales in November, as reported in the latest monthly data by the National Association of Realtors. This upturn marked the conclusion of a five-month consecutive decline trend. According to Realtor.com, year-over-year transactions decreased by 7.3%, representing the smallest annual decline since April 2022. The home sales transactions that led to contract closings likely transpired in the two months preceding November, coinciding with a period where the average thirty-year fixed mortgage rate reached levels unprecedented in more than two decades. This suggests that prospective home buyers, sensitive to the higher rates, might be in the process of adapting to the new mortgage rate environment.In December 2023, there was a considerable 22% year-over-year rise in home purchase mortgage applications, as per the Mortgage Bankers Association. Prospective buyers are receptive to revisiting their purchasing plans in the housing market as a long-term investment considering the 6% mortgage rates, according to NAHB’s CEO Jim Tobin. Fannie Mae anticipates an upward trend in mortgage activity, with single-family mortgage originations showing a gradual yet significant recovery in 2024. In December, housing permits underwent a 2% increase from November and a 6% increase from the previous year, as reported by US Census data. Despite a 4.3% monthly decrease, housing starts have risen 7.6% compared to last year. There has also been a recent increase in foot traffic in model homes, indicating a potential surge in springtime home-buying activity for the upcoming year. According to Redfin, affordability may lead to a 5% increase in home sales and a 1% decrease in house prices goes hand-in-hand with affordability, likely resulting in greater home sales. Projections suggest a minor alleviation in home prices, with a slight decrease of  <2% on average for the year. The impact of declining mortgage rates and income growth is forecasted to enhance the affordability of home purchases. New affordability resulted in a projected average home purchase mortgage payment share relative to median income of 35% in 2024. This percentage is expected to shrink to below 30% by this year’s end. 

History‍

A.Current Stances

The housing market has been through plenty of ups and downs throughout the past few years. At the start of COVID-19, there was a stall in the housing market due to economic uncertainty. The median price for a house in 2020 was only $329,700, a drastic difference from the $417,700 median price in 2023. The average mortgage rates were at an all-time low. Everyone was feeling cramped due to quarantine, and supply chain issues did not help the housing supply. These factors resulted in an extremely hot housing market, with homes sold at well over the asking price mere hours after being listed on the market. Lower mortgage rates encouraged American homeowners to sell their properties and buy new houses at cheaper rates. According to the Urban Institute, by the end of 2020, only two and a half months of housing supply were left. While housing prices were rising, so was the inflation rate. As measured by the Consumer Price Index, the annual inflation rate started at 1.7% in February 2021 but rose to about 9% by June 2022. Higher inflation rates created a housing bubble, with a rise in prices due to demand, speculations, and large spending. The Federal Reserve continually raised interest rates to combat the inflation overtaking the economic market. As a result, fewer buyers joined the housing market since they were unable to afford the current home purchase prices.

Policy Problem

A. Stakeholders

‍According to a recent study with the National Association of Home Builders, 96.5 million households are unable to afford the average-priced home at $425,786, with a mortgage rate of 6.25%. The anticipated recovery in the housing market has implications for homeowners aiming to sell their properties, prospective buyers in search of new homes, and renters contending with fluctuations in rental prices influenced by housing market conditions. With many homeowners locked in with 4% mortgage rates and the current rates around 6-7%, they would stand to lose money by choosing to relocate elsewhere. If the prediction is correct and the housing market improves, homeowners might feel comfortable selling their properties, improving the housing inventory for buyers to choose from across the country. Additionally, local, state, and national government agencies are closely monitoring the housing market due to its impact on the economy. A revival in the housing market could cause economic growth through increased construction activity, job creation, and related spending. Changes in the housing market can influence interest rates, which, in turn, affect borrowing costs. Government agencies might adjust monetary policies to support or manage the implications of a housing market revival. 

‍B. Risks of Indifference

‍If this prediction is ignored, there is a risk that homebuilders and developers will not be able to adequately prepare for the increased demand for housing, resulting in housing shortages. The status of the housing market is closely tied to the well-being of the economic market. Neglecting to heed this prediction could hinder economic growth and limit revenue opportunities, resulting in  the emergence of housing bubbles or abrupt spikes in prices. Without diligent monitoring and effective market regulation by stakeholders, the consequence could be unsustainable expansion and the potential for future market crashes. As the demand for housing is increasing at a faster rate than the supply, there is a risk that indifference could contribute to rising housing costs, dissuading potential buyers from purchasing a home. By not adapting their financial strategies to changing market conditions, investors also may be exposed to risks such as higher interest rates and increased competition for desirable properties. Investors might delay or avoid any investments in real estate, which could result in slower economic growth in the construction and related industries, impacting job creation and overall economic activity.

Policy Options

2023 was a tough year for the housing market: mortgage rates were at a high of 7.79% in October, with median home prices at a national average of $400,000. As mortgage rates rose, demand decreased, as buyers decided to delay buying a home until prices were more affordable. Supply also decreased significantly, thus pushing up the price of existing homes and adding even more strain on the market. Assuming that the Federal Reserve lowers  the Federal Funds Rate, there will be a lower benchmark interest rate on mortgages and loans. By doing so, the Federal Reserve would lower demand, but the limited supply in the housing market means that prices would not reflect this change.To deal with supply and price issues, local governments can enact policies outlining specific zoning laws for certain areas. This will help curb gentrification, to start, and will ensure that homes are being built to satisfy the needs of existing residents and prospective residents of a specific socioeconomic status. Indeed, a study from the Joint Center for Housing Studies at Harvard University supports this proposition: the ratio of income to average home price has reached an all-time high in 78% of the country’s largest cities. Home prices are surpassing wage growth and doing so in regions struggling with gentrification and other long-term issues. By dictating which types of developments can be built in certain neighborhoods, municipalities will ensure that middle-income or lower-income buyers will not lose potential real estate to other groups. The same measures can be put in place in higher-income neighborhoods, but it is vital to ensure that these restrictions are not solely focused on increasing homeownership for the upper echelon. Since 2010, 71% of added value in the home market has come from high-income homeowners, or those who earn over 200% of an area's median income. The aim of housing policy is not just to stabilize the market but to create a space that is more equitable and affordable for all homeowners. Current economic conditions have not made homeownership easy for any American, but clearly, those with below-average incomes have struggled the most with this market volatility.

Conclusions

The housing market has experienced significant volatility over the past few years, incited by the Covid-19 pandemic. A hot housing market from low-interest rates and increased demand from American homeowners led to the formation of a housing market bubble in 2021. The continuous increases in interest rates set by the Federal Reserve to combat inflation have contributed to a notable housing market slowdown starting in late 2022. However, the anticipated revival of the market in 2024 will hopefully increase housing affordability for American consumers and spark further growth in the construction sectors and the economy as a whole. 

Acknowledgment

The Institute for Youth in Policy wishes to acknowledge Michelle Liou, Joy Park, Nolan Ezzet, and other contributors for developing and maintaining the Policy Department within the Institute.

References

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