At the beginning of 2023, the majority of economists predicted a recession. Instead, the U.S. witnessed economic growth, historically low unemployment, and steady consumer spending—all amid ongoing inflation and interest rates that reached a 22-year high. The housing market, too, witnessed similarly perplexing outcomes. In light of a looming recession, economists expected lower interest rates and declining home prices, but instead, mortgage rates continued to climb while housing prices remained high.
This past year was a stark reminder that economic predictions are complex, especially as the world continues to navigate the unpredictable outcomes of the COVID-19 pandemic. At Qualia’s 2024 Future of Real Estate Summit (FORES24), economic experts Marina Walsh, VP of Industry Analysis at the Mortgage Bankers Association (MBA), and Odeta Kushi, Deputy Chief Economist at First American Financial Corporation, spoke to Qualia’s COO, Jess Tory about how they are examining a breadth of economic indicators to make informed predictions for the year ahead.
When will the Federal Reserve make cuts?
“Any conversation regarding an economic forecast involves two words: Federal Reserve,” Walsh said. “For the past 12 months, we’ve been talking about an economic slowdown, but this economy keeps chugging along and is very resilient.” Ultimately, a high-spend, low-unemployment environment keeps inflation sticky, encouraging the Federal Reserve to keep rates high.
For the past year, mortgage rates have remained stubbornly high. According to Freddie Mac, the average 30-year fixed rate reached an all-time record low of 2.65% in January 2021 before skyrocketing to 7.79% less than two years later in October 2023.
The MBA expects mortgage rates to decrease to 6.5% overall by the end of 2024; however, it’s unknown when cuts will take place, and it’s possible that they may not happen until the end of the year. For instance, the upcoming election might encourage the Federal Reserve to make cuts; on the flip side, the election could create a sense of hesitancy, which would limit any big changes from the Fed.
Housing affordability in the year ahead
Housing affordability challenges continue to persist largely due to supply issues, which are compounded by growing demand. Millennials, the largest generation in history, are aging into prime home buying years in large numbers—a trend expected to continue into 2030. “There’s lots of shadow demand from this generation who are waiting to jump into the market,” Kushi said.
The housing shortage problem is further exacerbated by the fact that 87% of mortgaged homes have a rate below 6%, which creates little financial incentive for homeowners to leave their homes. “About 90% of housing inventory is made up of existing homeowners putting their home on the market…but they aren’t budging,” Kushi said.
Meanwhile, new home construction is still catching up from over a decade of underbuilding. “Luckily, we had a surplus to whittle through, but once that surplus diminished we started to build a deficit that has only grown,” Kushi said. According to Kushi’s research, the US has a shortage of 3 million housing units. Meanwhile, the number of homes under construction is only 1.7 million.
This inventory-constrained environment, combined with growing demand, has created the persistently high home prices seen across the country. In the year ahead, First American predicts home prices will increase 6% year-over-year. And while there will be some improvements in overall affordability (a predicted 5% improvement by the end of 2024) thanks to lowering mortgage rates, rising incomes, and stabilizing home price increases, affordability is still 30% lower than when the Federal Reserve started increasing rates in 2022.
While the short-term conditions look bleak, Kushi expects that by the 2030s, the housing shortage will even out. Baby Boomers, who are expected to age out of homeownership by that time, will cause more homes to come online again. Meanwhile, record-high apartment construction should cause rent prices to drop (an important part of the inflation equation), likely encouraging the Federal Reserve to make cuts. The MBA predicts rates could hit 5.5% by the end of 2025.
Is there a magic interest rate number to “unlock” the housing market?
The MBA anticipates that mortgage originations will go up by 23% on a dollar basis, but only by 17% on a unit basis. This is largely due to home affordability challenges, which are further amplified by high interest rates. So, when it comes to housing affordability, is there a magic number that will “unlock” the market and bring home buying levels back to pre-pandemic levels?
Kushi noted that many analysts believe 5.5% could be the rate at which people jump back into the market; however, she cautioned that this is very dependent on home prices. “There are a lot of factors [other than interest rates] that could unlock the market,” she said.
Walsh echoed Kushi’s sentiment, “inventory trumps rate,” she said. “If we can get builders building…there are more than 50 million 40-year-olds ready to buy…Regardless of mortgage rate, if we can get supply in control, that will go a long way.”
To hear more from Kushi and Walsh on housing market predictions for the year ahead, watch their full discussion from FORES24.
