Between record inflation and Federal Reserve’s interest rate hikes, Americans have recently seen sharp upticks in mortgage rates. Housing market data shows that in 2023, mortgage rates peaked at 7.49%, the highest since 2002. Some data suggests that if mortgage rates decline significantly, then housing inventory may grow because existing homeowners will not be as tied to their historically low existing mortgages (some lower than 3%) and will move to more suitable homes (upsizing, downsizing, moving to a retirement community, or moving closer to work, etc.). What will that mean for the housing market?
Housing Market Outlook 2024
Will home prices drop? The answer depends in part on the federal funds rate and the inflationary pressures driving the macroeconomic environment. Fannie Mae predicts that by the fourth quarter of 2024, mortgage rates may drop to as low as 6.3%. The Mortgage Bankers Association is even more optimistic and predicts rates that drop to 5.4%. Bottom line: mortgage interest rates may decrease over the span of the coming year. The current 7% interest rate may no longer be the norm, which may prompt more buying and selling.
Will Interest Rates Drop in 2024?
Homebuyers may see mortgage rates drop by the end of 2024 — though not necessarily before. In fact, some economists are predicting that the Federal Interest Rate may not begin to drop until the fourth quarter of 2024, which means that mortgage rates may take time to drop to these lows. According to a survey from the Financial Times, roughly half (48%) of economists (they never agree with each other!) believe that the Fed will raise the interest rate from 5.5% to 5.75%, while another third (35%) believe it will climb as high as 6%. Still, a drop in the federal funds rate late in the year could result in a drop in mortgage rates. The two rates are not identical, you’ll notice, but they tend to move in tandem. If the Fed does pursue a cut in interest rates, it could bring an increase in the number of mortgage applicants.
Will the Housing Inventory Increase in 2024?
Again, the housing market largely depends on which way interest rates move — and when. 2024 may see an increase in home inventory, partly fueled by more buying and selling activity among existing homeowners and new buyers.
Some homeowners may have considered moving but have been scared off by rising interest rates. If interest rates drop, it may prompt more existing homeowners to sell their property and relocate to a new area. As a result, communities may see more homes for sale as owners seize the opportunity presented by declining mortgage rates.
The sales rate of existing homes dropped by over 15% from 2022 to 2023. But if homeowners consider relocation, it could up the inventory of existing homes. And some existing homes may offer a better price point for buyers looking to save money by investing in a fixer-upper as opposed to new construction.
Construction of new homes fell by 8% during 2023. However, the lack of resale inventory may prompt more construction companies to pursue new construction projects. Additionally, if inflation eases in the next year, it could also mean a decline in the cost of construction materials. Such a drop would aid in the construction of new homes, which could translate into increased inventory as 2024 progresses.
Will Home Prices Drop in 2024?
Can buyers expect to see home prices dropping in 2024? The answer depends on both the state of housing availability as well as the interest rates that 2024 will bring.
Will house prices fall when interest rates rise 2024? Who knows. If prices drop, it probably won’t be until interest rates begin to fall, though it’s not clear how much this will impact home prices. 2024’s interest rates may prompt buyers to commit to a decision. But while a drop in interest rates may encourage existing homeowners to sell and relocate, interest rates may not drop low enough to trigger a major trend. That’s because the majority of homeowners (62%) have mortgage rates lower than 4%.
Housing availability may increase over the course of the coming year, but it still may not be a sufficient increase to drive down the average sale price of a home. A backlog of housing demand will mean that until the housing market sees a surge in inventory, prices will continue to remain high.
Rates 2024: What It Means for the Market
Rather than trying to time the housing market, buyers might consider strategies such as:
Purchasing an existing home rather than waiting for new construction
Shopping in a more affordable area and commuting to work
If all else fails, home buyers might want to already plan to refinance their mortgage when rates drop. In other words, you may have to accept a higher-than-desired interest rate today, but you can obtain a new mortgage when rates are in your favor.