As the economy improves, mortgage rates could dip as low as the 4% range, bringing buyers back to the market.

The inflation rate has been calming in recent months, contributing to falling mortgage rates through the holidays. Consumer prices are still running well above the typical 2% inflation rate, but November’s level of 7.1% was the lowest in 2022. Decelerating inflation is the key reason for the forecast of a 5.5% mortgage rate by the second half of 2023. Should the deceleration speed up faster than expected, the possibility of mortgage rates in the 4% range exists—which would bring buyers back to the market.

A significant potential contributor to the continuing decline in inflation is the rent people pay and the equivalency in rent owners would have paid. These measures are still on accelerating paths, with annual gains of 7.9% and 7.1%, respectively—their highest rise since the early 1980s. These huge gains are a result of the housing shortage and historically low rental vacancy rates. But lagging data shows the housing shortage is not as acute as previously thought. The rental vacancy rate was 6% in the third quarter of 2022, up from 5.8% a year earlier, and overall sale inventory is up 2.7% in December. Data on new lease rates from apartment property managers show a marked slowdown in gains.

Moreover, multifamily housing starts—which are primarily apartments—hit 550,000 units in 2022, the highest in nearly 40 years. Apartment vacancy rates will undoubtedly rise further. Rent growth will surely slow. Overall, consumer prices will calm down even further.

In addition, NAR has advocated for converting vacant commercial space (empty shopping malls or office buildings, for example) into residential units through funding and/or tax credit incentives. Financial incentives to rehab dilapidated, abandoned homes in some major cities will also help bring about more housing supply and greater neighborhood safety.

As to the economy, there could be a recession—or maybe not. GDP is sliding along the near-zero growth line, but strong job creation is a bright spot. Despite layoffs in some industries, overall job openings still exceed the number of unemployed by a 7-to-1 ratio. Net job creation will be around 1 million to 2 million this year. The people who take those jobs are future homeowners.

First-Time Buyer Share Still Low

Only 28% of home sales in November were by first-time buyers. That’s unchanged from October but up from 26% in November 2021. NAR’s 2022 Profile of Home Buyers and Sellers, released in November, found that the annual share of first-time buyers was the lowest since NAR began tracking the data.

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The Fed today would do well to consider the wisdom of Wayne Gretzky.

Mortgage rates fell on the day Silicon Valley Bank went bankrupt. In times of panic, financial market investors seek out the safest asset. Nothing is more secure than U.S. government bonds; they will be paid. There are, however, interest rate risks that all banks should properly manage or suffer the fate of SVB.

Government-guaranteed assets are next, so the mortgage investors of VA, FHA and most conforming mortgages can be assured they will get their money back. The average 30-year rate, therefore, fell from 7% to 6.5% in the course of two days. On a typical-size mortgage, the monthly payment fell by roughly $100.

More declines could happen. Stubbornly high consumer price inflation is decelerating, if slowly. It was running at 9% in mid-2022 before showing some improvement to 6% in February’s data. It needs to get to 2% before the Fed can declare victory, which is still two years away, but getting inflation to around 3% to 4% looks likely by year’s end. Despite the frustration of high egg prices, it’s housing costs that matter: Eggs are weighted at 0.2% of a typical household budget, while shelter costs represent 34.4%. And while rental costs are still accelerating at a rate of 8.8% annually, various private sector apartment data show actual rent declines. Also, construction of apartment units is at a 40-year high. More vacant units will soon appear, decelerating rents, possibly sharply.

Given rent projections and the lagging impact of Fed actions, the Fed needs to follow the maxim of hockey great Wayne Gretzky: Go where the puck will be and not where it is. The Fed should stop raising interest rates.

One significant risk remains. Are U.S. bonds the safest asset? The national debt level is making a hockey stick–shaped upturn to $30 trillion. A default is out of the question. But higher borrowing costs for all, including the government, could occur if Washington cannot get its act together.

Halting First Steps

First-time buyers made up just 27% of home sales in February 2023, down from 31% in January 2023 and 29% in February 2022. The first-timer share of the market was the lowest in 2022 since the National Association of REALTORS® began tracking the data.

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As rental rates slow, owners may consider returning inventory to the market.

Real estate investors have done well. Rents have risen and home price appreciation has been quite exceptional. In the past three years, the typical rental rate and typical home price have soared by 16.4% and 35.5%, respectively. Over the past five years, those figures are 24.9% and 50.8%. These returns were occurring at a time of low-cost financing.

Now it’s time for investors to sell. Home prices have already retreated in some markets—especially in the west, where the median price is 8% lower than a year ago.

There are 44 million renter households: Half live in midsized to large apartment buildings, while the other half rent single-family, duplex, triplex or quadplex units. Although apartments are not necessarily as competitive as single-family rental units, a 40-year high in multifamily construction means many units will be hitting the market in the upcoming months and into next year. Rent growth has already turned the corner from acceleration to deceleration, still rising in most markets but at a slower pace. Looking at single-family construction, builders are still underproducing compared to the historical average, but new-home sales are back to pre-COVID levels. Home builders are making profits, stock prices for publicly listed construction companies have risen by around 50% in the past year, and inventory of new homes is plentiful.

That’s not the case for existing homes. The latest inventory of 1 million is a historic low, and that’s hindering existing-home sales. Multiple offers are still happening on mid-priced homes. We need 50% growth in listings to reach pre-pandemic 2019 levels. We need 100% growth to reach an adequate supply. This is where investors come in—or rather, come out. The National Association of REALTORS® is calling for a federal incentive to help bring needed inventory to the market: temporary capital gains relief for investors who sell to a first-time buyer or first-generation buyer.

Days on Market Trend Down

Properties remained on the market for a median of 18 days in May, down from 22 days in April but up from 16 days in May 2022. Seventy-four percent of homes sold in May were on the market for less than a month.

Affordability and Supply

A new NAR and realtor.com® study estimates how many homes are “missing” from the market by income level. The largest shortage of homes is in the price range that middle-income buyers can afford.

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Contract signings picked up the pace last month, and home buyers are increasingly facing multiple offer situations. NAR releases its housing forecast for the remainder of the year and 2024.

Pending home sales rose slightly in June, and the latest indicators are showing a housing market on the mend. Median existing-home sales prices in June soared to their second highest on record in the last two decades, and more buyers are facing multiple offer situations once again, the latest reports from the National Association of REALTORS® shows. NAR’s Pending Home Sales Index—a forward-looking indicator of home sales based on contract signings—rose 0.3% in June, the first increase in four months.

“The recovery has not taken place, but the housing recession is over,” says Lawrence Yun, NAR’s chief economist. “The presence of multiple offers implies that housing demand is not being satisfied due to a lack of supply. Homebuilders are ramping up production and hiring workers.” 

Housing inventories remain at historical lows, down 13.6% from even last year’s low levels. “There are simply not enough homes for sale,” Yun said in a recent report. Seventy-six percent of existing homes sold in June were on the market for less than a month, NAR’s data shows.

Home buyers are faced with limited choices, higher home prices and higher mortgage rates. But they may find some relief soon: Mortgage rate increases may be mostly over, and that would bode well for home-buying, Yun says. 

“With consumer price inflation calming close to the Federal Reserve’s desired conditions, mortgage rates look to have topped out,” Yun says. “Given the ongoing job additions, any meaningful decline in mortgage rates could lead to a rush of buyers later in the year and into the next.”

NAR forecasts that the 30-year fixed-rate mortgage could reach 6.4% by the end of the year, followed by 6% in 2024. Over recent weeks, mortgage rates have been nearing 7%, far from their ultra-low 2% or 3% averages just over a year ago. 

Home Sales Outlook

NAR released its latest forecast showing what they believe will be the trajectory of the market over the coming months: 

• Existing-home sales: NAR predicts existing-home sales to fall 12.9% in 2023 compared to 2022, and then climb by 15.5% in 2024.  
• Prices: National median existing-home prices are expected to remain mostly steady, likely ending this year just 0.4% down compared to 2022, reaching $384,900 for 2023. Home prices are then expected to rebound by 2.6% in 2024 to $395,000, NAR predicts. The West—the nation’s priciest region—likely will see prices reduced more, while more affordable regions, like the Midwest, are forecasted to post moderate increases, NAR’s report says. 
• New-home sales: Sales of newly constructed homes are forecasted to be a bright spot for home sales, as more buyers search for greater inventory options. New-home sales are expected to rise by 12.3% in 2023, and by another 13.9% in 2024, NAR predicts. The national median new-home price is expected to fall by 1.9% this year, to $449,100, before jumping by 4.2% the following year to $468,000.  
• Housing construction: Economists have been calling on the new-home market to make up for the supply deficits in the real estate market. But NAR is forecasting that housing starts will fall 5.2% in 2023 compared to 2022 (reaching 1.47 million). Housing starts are expected to ramp up in 2024, however, rising 5.4% to 1.55 million. 

“It is critical to expand supply as much as possible to widen access to home buying for more Americans,” Yun says. “Home prices will be influenced by how much inventory is brought to market. Increased homebuilding will tame price growth, while limited construction will lead to home price appreciation outpacing income growth.”

Regional Breakdown on Contract Signings

Meanwhile, the latest housing market conditions show a market much slower than last year’s brisk pandemic-fueled pace. Overall, pending home sales were down in June by 15.6% compared to last year, NAR’s data shows. But market performance did vary regionally. Month over month, contract signings increased in the Northeast and Midwest, while falling in the South and West. Nevertheless, all four major regions of the U.S. posted year-over-year decreases in transactions in June. 

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Homebuilders are providing options buyers can’t find in the existing-home sales market.

Newly built homes account for a small share of the home sales market, generally around 10%. But builders have grown that percentage this year and will make further gains in 2024. Even with higher mortgage rates, new-home sales are rising because builders are bringing more inventory onto the market than they did before the COVID-19 pandemic. By contrast, the market for existing homes is gummed up by lack of inventory, which is about half of what it was in 2019. After two consecutive years of near-20% declines, existing-home sales will recover next year with a baseline gain of 10% to 15%. If, somehow, more inventory bursts forth, a surprisingly positive gain of 25% to 30% is a distinct possibility. Lack of supply is behind ongoing multiple-offer scenarios on moderate- to mid-priced homes and attests to the importance of inventory in getting the market moving.

Builders can add inventory by constructing homes. Boosting existing- home inventory requires owners to give up the low mortgage rates they secured a couple of years ago. Rates in the 2.5% to 3% range may be too good for some owners to surrender. But consider the life-changing events that took place during the past two years: 3 million marriages, 1.5 million divorces, 7 million births, 4 million deaths, and 7 million Americans reaching 65. Staying put isn’t an option for many growing families or divorcing couples. The dream of retiring to a home requiring less maintenance can’t be postponed indefinitely. People need and want to move. Even a small fall in mortgage rates could be the enticement.

In the past two years, we’ve seen 4 million net new jobs, along with 50 million job switches. Many office workers would like a home that accommodates new hybrid work policies.

Pent-up supplies have been steadily building. Combine that with the usual demand response from lower rates, and the home sales market will become more dynamic.

Virtual Purchases Persist

Although sales were down slightly in August, NAR data indicates buyer motivation remains strong. Market pace and technology spurred 7% of buyers in August to purchase a home based only on a virtual tour, showing or open house, virtually unchanged from one year ago.

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Borrowing costs have fallen over the last two months.

Mortgage rates are ringing in the new year much lower than their near-8% peak this past fall. The 30-year fixed-rate mortgage has decreased for the past nine weeks, though breaking for a slight uptick this week to reach 6.62%, Freddie Mac reports.

“The overall trajectory of mortgage interest rates in 2024 is expected to decrease,” says Jessica Lautz, deputy chief economist at the National Association of REALTORS®. “While mortgage interest rates ease, there will be weekly shifts in the average rate. As home buyers move forward into the spring market, staying closely attuned with a mortgage broker can help them navigate the best rate.”

At this week’s rate of 6.62%, a monthly mortgage payment for a $400,000 home would translate to $2,048, Lautz says. That is considerably lower than in the fall, when a rate of 7.12% translated to a monthly mortgage payment of $2,221.  

Between late October and mid-December 2023, the 30-year fixed-rate mortgage plummeted more than a percentage point, says Sam Khater, Freddie Mac’s chief economist. “Given the expectation of rate cuts this year from the Federal Reserve, as well as receding inflationary pressures, we expect mortgage rates will continue to drift downward as the year unfolds. While lower mortgage rates are welcome news, potential home buyers are still dealing with the dual challenges of low inventory and high home prices that continue to rise.”

NAR is predicting that the 30-year fixed-rate mortgage will average 6.3% in 2024.

Freddie Mac reports the following national averages with mortgage rates for the week ending Jan. 4:

• 30-year fixed-rate mortgages: averaged 6.62%, rising slightly from last week’s 6.61% average. A year ago, 30-year rates averaged 6.48%.
• 15-year fixed-rate mortgages: averaged 5.89%, dropping from last week’s 5.93% average. Last year at this time, 15-year rates averaged 5.73%.

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