At the end of last year, forecasters were bullish on the 2024 housing market. The Fed was going to cut interest rates and mortgage rates were going to fall fast. Buyers who had been waiting on the sidelines were going to be out in full force. The housing market would bounce back from 2023 when home sales were at a 30-year low. At this time last year, all signs pointed to a busy 2024 housing market.
But as the year winds down, it looks like overall home sales in 2024 will barely eke past last year’s total. Forecasting is challenging when the economy and housing market are operating normally, but in today’s unusual environment, it’s even more difficult. Forecasters do their best to predict where things are headed based on past trends and assumptions about the future, but many housing market forecasts for 2024 were off the mark. What happened?
The Federal Reserve did not cut interest rates as soon as was expected. The Fed’s stance was clear—there would be no rate cuts until inflation reached the central bank’s 2% target. While inflation was down significantly, progress petered out in the early part of 2024. By the summer, inflation was still at or above 3%. It was at that point that Federal Reserve Chairman Jerome Powell made a subtle change to his statement by saying that the Fed would not cut rates until inflation was “moving meaningfully” toward the 2% target. With that shift in emphasis, the federal funds rate was cut by 50 basis points in September, the first cut in four years, but too late to give a boost to the 2024 housing market.
Rate lock meant more potential sellers stayed put. Record low mortgage rates during the pandemic enticed millions of people to buy homes and refinance existing mortgages. But when inflation began rising, mortgage rates also increased quickly. The gap between the rate a new borrower could get and the average rate held by a current mortgage holder widened. Suddenly, homeowners who might have wanted to sell their home were faced with the reality of trading in their sub-3% loan for one around 7% (or even higher). This “rate-lock” effect reduced the number of homes available for sale in 2024.
Affordability became a major constraint in 2024. Record high home prices and rising mortgage rates put a strain on homebuyers, particularly first-time and moderate-income buyers. Housing affordability hit an all-time low, and the housing crisis became a critical issue in the presidential election. Without more supply, home prices continued to rise in most markets throughout 2024. Even with a dip in interest rates, many prospective buyers were still priced out.
It’s going to take more time to work through the hangover of the COVID-19 pandemic and the associated economic and housing market outcomes. Watching the basics that drive housing market activity—particularly demographic and economic fundamentals—will be important for understanding where the housing market will head in 2025. Overall, there’s still significant pent-up demand for homeownership. There’s also a bottleneck of would-be sellers. The state of the 2025 market will depend on whether the basic fundamentals—such as mortgage rates, new construction and labor market conditions—line up to unleash the accumulated deferred transactions.
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