Whether it was a soaring stock market defying constant expectations of doom, a job marketrefusing to quit despite higher interest rates from the Fed or a housing market largely frozen in place due to steep mortgage rates, 2023 was full of surprises. In 2024, we’ll find out if the housing market can enjoy the same type of soft landing seemingly engineered by the Federal Reserve for the U.S. economy.
Just over a year ago, when I suggested to “expect a year of uncertainty mixed with the market slowly trending in favor of buyers,” that was mostly due to six ongoing trends in place at the time. These trends, including stubborn inflation (and higher mortgage rates), economic growth (or decline), the moving target of remote work, labor shortages, monetary tightening by central banks and turbulence in financial markets all came into play during the year.
Few professional economists and their armchair compatriots in homes and offices around the country would have predicted the most unexpected item of 2023: the Federal Reserve seemingly engineering a soft landing in its fight against inflation without causing a recession.
If anything, Fed Chair Jerome Powell was consistently derided for hiking rates too late and keeping them high for too long, leading in part to a semifrozen housing market with most potential sellers refusing to part with their unusually low mortgage rates.
In turn, the lowest inventory of existing homes for sale in decades helped propel a dramatic shift favoring new home builders and the incentives they could offer in the form of mortgage rate buydowns – against which most willing sellers of existing homes had little ammunition.
At the end of 2023, the stock market was certainly celebrating, and mortgage rates had fallen from recent highs on the assumption of several federal funds rate reductions throughout the year. The overhang of excess jobs versus the number of unemployed workers had fallen, fewer people were quitting in search of greener pastures (pun intended), and the unemployment rate remained under 4%. Celebrations were certainly in order.
However, Fed officials are cautioning that their work is not done yet and getting to the finish line of inflation closer to 2% per year may delay lower rates in 2024. Besides higher inflation potentially returning given a tight labor market for services, rising price tags for climate-related disasters, emerging geopolitical tensions around the world and numerous elections around the world – the most in recorded human history – this year will likely also provide its own unexpected events. The most likely potential domestic risks to the economy from these factors could include higher oil prices and backed-up supply chains.
For the housing market, lower mortgage rates are widely expected to lead to a surge in pent-up demand for not just new homes but for existing homes offered by sellers who need to move for a variety of reasons. Average fixed 30-year mortgage rates, which last peaked at 7.8% in late October, have since fallen by over 100 basis points, suggesting an early start to the homebuying season.
Homebuilders are certainly feeling more bullish, with the NAHB/Wells Fargo Housing Market Index rising three points to 37 in December, reversing a four-month decline. The six-month outlook is even better, rising six points to 45. Still, actually selling new homes in an environment of elevated mortgage rates is challenging, with 36% of builders reporting cutting home prices by an average of 6%. A much higher share of builders (60%) offered various sales incentives in December, matching November’s share but edging down from 62% in October.
The decline in mortgage rates also prompted more activity in housing starts, which surged in November to a six-month high of 1.56 million per year. With the rising popularity of build-to-rent homes, builders were more bullish on single-family units. These starts surged over 42% year-over-year to 1.14 million per year, the highest level since April 2022.
While multifamily developers did start nearly 9% more units in November versus October, the year-over-year decline of nearly 34% does point to abundant supply in multiple markets. The disconnect between single- and multifamily demand and supply will likely become more obvious in the months ahead, with rising vacancy rates, falling rents, more tenant incentives and higher cap rates indicating additional risk for apartment landlords. By Patrick S. Duffy
Lakewood Realty Blog 