Interest rates have been elevated for a long time now, a stretch spanning the longest period for high interest rates that we can remember. Starting in March 2022, rates have ratcheted up to their current levels and have been there for 2½ years now.
But as I have been predicting for some time, rates will come down, although the timing remains elusive as the Fed continues to pore over the data on the economy to make sure they don’t lower too soon and risk the chance of re-igniting inflation. The current betting is the first reduction will happen in September.
But one thing is certain: as rates come down, it will spark a recovery in both existing home sales, as well as the new home market. This view is solidified by the mid-year outlook for housing issued by the National Association of Realtors, who have published a comprehensive report on the state of housing and the outlook for the next year.
The Report. The report states that mortgage rates have been revised slightly lower as signals from the economy suggest that it will be appropriate for the Fed to begin to cut its rates in the months ahead. The yearly mortgage rate average forecast, a closely watched metric, is down to 6.7%, and the report has revised its year-end forecast to 6.3% from 6.5%.
But surprisingly, home price growth has been much stronger than originally forecast as the U.S. economy remains resilient, even in the face of a higher rate environment. As a result, the report revised its original forecast from a decline of 1.7% to a gain of 4.6% for 2024 as a whole.
Home sales are expected to register only slightly higher than initially forecast, with an increase of 0.8% for 2024. This would mean a total of 4.1 million home sales for the year, the second-smallest annual total since 2012.
As demand putters along and sellers remain patient, inventory has started to accumulate on the market, more than originally forecasted, and that caught the housing market off guard. As a result, the report made substantial changes to its inventory forecast – from a decline of 14% for the year as a whole to a gain of 14.5%, a remarkable swing.
And one of the best pronouncements coming from the Realtors echoes what I have said over and over: don’t expect the wild card election year to be that wild on the economy or housing market in 2024, as elections have little impact on the economy. But again, like I have said often, the looming political battle over tax policy changes in 2025 will be the debate that creates volatility further down the road.
Metrics. A couple of other metrics in the report also stood out. Existing-home median sales price appreciation was up 4.6% as compared to the earlier prediction of being down 1.7%. This compares to the 2023 appreciation rates of 1.1%.
Further, existing-home sales were revised upward by 0.8% to 4.1 million from the previous prediction of an increase of 0.1% to 4.07 million. The 4.1 million prediction confirms a flat market when compared to the 4.09 million existing home sales in 2023, as buyers continue to warm the benches waiting for interest rates to fall.
Single-family home housing starts were originally predicted to increase 10.5%, or 1 million homes this year, in expectation of the Fed lowering interest rates sooner, but that prediction did not materialize. As a result, the forecast was short by more than 100,000 starts to less than 900,000, again flat with the 2023 actual start numbers. This is a long way from a normalized new housing starts of around 1.5 million homes, portending a housing shortage when interest rates normalize, further driving up home prices.
And finally, it appears the rental market has cooled from its torrid pace of an 11.8% increase in calendar 2023, as it was actually down by 0.2%, but not as low as the decrease of 0.5% as originally predicted at the beginning of the year.
We are all awaiting the elusive – but certain – drop in interest rates that will re-ignite the market, and add volume to our industry.