🏡 The Great Housing Market Pivot: Balancing Affordability and Mortgage Trends 🔄

Dated: March 2 2024

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The housing market, which is constantly evolving, has recently seen changes in affordability primarily due to a significant drop in mortgage rates from their October peak. This change has sparked interest among potential buyers who had earlier been deterred from entering the market. Sales in the last quarter of 2023 saw a dip, largely due to a shortage of inventory. However, for a new home priced around $332,900, with a 10% down payment, the monthly expenditure decreased by over 1% to $2,120, as reported by the National Association of Realtors (NAR).

While the NAR noted that sales were somewhat slow towards the end of 2023, housing economists have highlighted the promising trend in pending sales. This forward-looking metric showed a significant improvement in December. Danielle Hale, the chief economist at realtor.com, explained to Newsweek, “Pending home sales tend to lead existing home sales by about a month or two. What December’s pending home sales data suggests is that we might see home closings pick up in January and February.”

In a hopeful sign for 2024, the NAR revealed that December saw a surge in pending home sales by over 8%. This increase has led housing economists to anticipate a rebound in buyers entering the market, spurred by declining mortgage rates. Lawrence Yun, NAR’s chief economist, optimistically stated in January, “The housing market is off to a good start this year, as consumers benefit from falling mortgage rates and stable home prices.”

However, a scarcity of inventory has led to intense competition among buyers, driving up prices in the process. The NAR recently reported that nearly 90% of America’s metropolitan areas experienced price increases, with the median price for a single-family existing home rising 3.5% to almost $392,000.

Despite the fall in rates from their autumn highs, they remain elevated. Hale noted that while buyers are showing interest, they have yet to make significant purchases. The key to further rate declines lies in the Federal Reserve’s decision to start cutting rates, which have been raised to combat inflation but have since stabilized.

Hale told Newsweek, “So while that opens the door for some home shoppers, it is also true that other home shoppers are likely waiting because they want to or because they have to for lower mortgage rates.” She added, “So, I think we’ll see more activity if rates drop further, which we do expect that they will, eventually, begin to decline further. But I think we’re gonna have to get a little bit more confidence from the Fed that it’s the right time to start easing or loosening up policy before that happens.”

Inflation in January rose at a slower pace than expected, according to data from the U.S. Bureau of Labor Statistics. This has led analysts to suggest that the Federal Reserve may take longer to lower borrowing costs. The Consumer Price Index (CPI) inflation rose by 3.1% in January, a slightly smaller jump than the previous month’s 3.4%. However, the January CPI was higher than what economists had anticipated, with predictions at 2.9%.

With inflation not slowing as quickly as expected, economists suggest that an immediate reduction in interest rates by the central bank is unlikely, which could impact the cost of home loans. The rise in rates beginning in March 2022 pushed borrowing costs for mortgages up to 8%, their highest level since the turn of the century. While mortgage rates have fallen over the last few weeks to a mid-6% range, elevated inflation beyond the policymakers’ target of 2% could halt their downward momentum, housing economists suggest.

“For the housing market, today’s data means that mortgage rates are likely to hang on to the narrow range they’ve occupied since late December, while moving toward the upper end of that range,” Danielle Hale, chief economist at realtor.com, said in a note.

At the start of the year, some investors had expected the Fed to begin reducing its funds rate as early as March from its current two-decade high range of 5.25 to 5.5%. But policymakers suggested in January that while they had probably reached the end of their hike cycle, an immediate trimming of rates was unlikely.

Like in December, shelter costs were the largest contributor to inflation, rising by 0.6% in January and “contributing over two thirds of the monthly all items increase,” according to the Bureau of Labor Statistics. After the January reading, experts are now suggesting that a decline in rates may come in later.

“The Federal Reserve will not cut interest rates in the first half of this year,” Lawrence Yun, the chief economist at the National Association of Realtors, said in a statement shared with Newsweek. “But rate cuts of 3, 4, or even 5 rounds will be possible in the second half of the year…Mortgage rates will be bouncy week-to-week but will most likely settle towards 6% by the year end.”

The inflation reading supports the Fed’s cautious approach to wait until policymakers are confident that prices are trending downwards to target, some analysts said. “This report underscores the Fed’s messaging that they’ll need more information specifically inflation-related data before a policy transition,” Quincy Krosby, chief global strategist for LPL Financial, said in a note shared with Newsweek. “The ‘last mile’—as expected—is proving to be stickier and more stubborn.”

“We did not believe a March cut was likely, instead we expect the first rate cut in May after plenty of inflation data is released,” Ryan Sweet, the chief U.S. economist at Oxford Economics, said in a note. “Therefore, the January CPI does not warrant a change to our assumptions around monetary policy but lends some upside risk to the inflation forecast this quarter.”

Sweet also pointed out that the Fed’s policymakers pay closer attention to the personal consumption expenditures (PCE) inflation index which has been slowing down quicker than the CPI. The latest data from that metric is slated to come in later this month.

As for when the Fed may start cutting rates, a consensus appears to be emerging that the late spring, or summer, is the likeliest timeline for when borrowing costs may start to fall across the economy. As the Fed potentially slashes rates, mortgage costs may fall as well helping buyers see monthly payments decline in the process.

“Fed policymakers will likely put this inflation report [in] the ‘not so good’ column as they continue to exercise caution in assessing when to start easing policy,” Gregory Daco, chief economist at EY, said. “Our longstanding view has been that the Fed would start cutting rates in May, but this report increases the odds of a June onset. We still expect a total of 100 [basis points] of rates cuts this year. Markets appear to slowly be aligning to this view.”

Predictions that 2024 will be another strong year for new-home sales were proven out in January, with mortgage applications for new-home purchases up 19.1% from a year ago, the Mortgage Bankers Association (MBA) reported Friday. It was the 12th consecutive annual increase in the MBA’s survey of builders, and the 38% jump in applications from December (not seasonally adjusted) was the strongest January reading in the history of the survey, which was launched July 2013, MBA Deputy Chief Economist Joel Kan said.

“Applications for new-home purchases were strong in January, as newly built homes remained an attractive option for prospective homebuyers who looked to take advantage of lower mortgage rates during the month,” Kan said in a statement. At 700,000 units, the seasonally adjusted annualized pace of new-home sales in January was the highest sales pace since October 2023, Kan said.

The latest data from the Census Bureau, released Jan. 25, showed new-home sales in December picked up to a seasonally adjusted annual rate of 664,000 homes, up 8% from November and 4.4% from a year ago.

The MBA’s Builder Application Survey, or BAS, has been an accurate predictor of trends in new-home sales, although it’s more likely to overestimate than underestimate the numbers that are released by the Census Bureau more than a month later.

While new-home sales have accounted for less than one in five total home sales in recent years, new-home sales grew last year while sales of existing homes shrank. The “lock-in effect” created by rising mortgage rates has kept many current homeowners from putting their homes on the market.

Forecasters predict sales of both new and existing homes will pick up this year, but that new-home sales will post stronger growth as homebuilders continue to work furiously to meet the demand that’s been amplified by the scarcity of existing homes for sale in many markets.

In a Jan. 19 forecast, MBA economists predicted that new-home sales will rise by 13% in 2024, to 761,000 homes, more than double the rate of growth for existing-home sales, which the MBA projects will increase by 5%, to 4.327 million.

The narrative is expected to flip next year, with the MBA forecasting lower interest rates will help boost sales of existing homes by 12%, to 4.848 million, and new-home sales growth cooling to 5%, with 801,000 new-home sales projected.

Forecasters at Fannie Mae were more cautious in issuing their latest projections last month, predicting an 8% increase in new-home sales this year, to 726,000, and 3% growth for existing-home sales, which Fannie Mae projects will total 4.238 million this year.

But Fannie Mae economists are in sync with MBA projections that existing-home sales will post double-digit growth in 2025 and outstrip growth in new-home sales. Forecasters at the mortgage giant expect new-home sales to grow by 14 percent

In summary, the housing market is a complex entity, influenced by a multitude of factors ranging from mortgage rates and inventory shortages to economic policies and inflation rates

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Roopa Nampally

I'm Roopa Realtor, an experienced real estate professional based in New Jersey. With over a decade of industry experience, I have established a strong reputation for delivering exceptional service an....

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