The U.S. housing market has shown tentative signs of recovery in recent months, with home prices and pending sales rebounding slightly in December, after declines through the latter half of 2023. However, the market remains subdued compared to recent years. Harsh winter weather across much of the nation in January has further dampened activity and outlooks remain uncertain as mortgage rates hover at relatively high levels.
Prices Show Upswing; Affordability Remains Fragile
Median U.S. home prices rose 5.1% in the four weeks ending January 21, the largest percentage increase since October 2022, according to real estate brokerage Redfin. The National Association of Realtors (NAR) also reported a 0.6% year-over-year gain in median home prices in December to $800,000 in New York City.
While lower than the sharp double-digit gains recorded over the past two years, the rise in prices is squeezing budgets for prospective buyers even as mortgage rates have stepped back from summer and autumn highs of around 7.79%. The average 30-year fixed mortgage rate held below 6.69% for a second straight week, providing a marginal lift, but remains roughly double year-ago levels and well above rates that most existing homeowners can deal with.
Realtor.com economist Hannah Jones noted that the boost in pending home sales in December, up 8% nationwide according to the NAR, indicates “the impact of a small win in affordability,” but that “any gains in affordability remain fragile.” Inventory remains low while demand still outpaces supply in most regions. Sellers are not yet distressed enough to accept the discounts most buyers need to afford a home.
NAR chief economist Lawrence Yun projected existing home sales to rise 13%, an increase to 4.62 million in 2024; while home price growth moderates. Realtor.com expects significant increases in both listings and sales this year.
Activity Stalls as Brutal Cold Keeps Buyers Indoors
Pending home sales declined 8% in the four weeks ending January 21, compared to the same period last year. The drop, the largest year-over-year decline in four months, reflects frozen activity amid heavy snow, ice storms and subzero wind chills; impacting well over half of the country in January.
A Redfin Premier agent in Grand Rapids, Michigan said that while serious buyers are still compelled by tight inventories to scheduled showings for the most desirable listings, “casual house hunters are staying home to avoid the roads.” Winter weather in northern locales tends to suppress the housing market even in good years.
In contrast, a Las Vegas agent said clients who intended to resume home searches in the new year have followed through, no longer shocked by high mortgage rates and eager to buy before competition intensifies anew. House hunters are re-emerging in warmer parts of the country.
Migration Trends: Californians Seek Affordability Out of State
Interstate migration picked up over the past year, as remote work policies enabled more long-distance relocations, not tied to a job change. New York, Los Angeles, San Francisco and other pricey, dense, coastal cities saw net outflows accelerate.
Realtor.com data on recent New York homebuyers showed 29% conducted searches for properties outside metro New York City, while 71% focused locally. For prospective NYC home sellers relocating elsewhere, South Florida and Philadelphia were the top two landing spots.
California homebuyers displayed similar patterns. San Franciscans leaving the prohibitively expensive Bay Area favored moves to more reasonably priced Sacramento, Las Vegas and Phoenix. Home prices in inland western and southern cities remain far below coastal hubs, even as gains in recent years have outpaced the nation. Boise, Idaho, Raleigh, North Carolina and other secondary markets ranked among the most popular destinations.
While demand is elevated in smaller hubs drawing new residents, the influx of buyers from high-cost areas is further strain on limited inventories and driving rapid price inflation across migration magnets. Some experts speculate demand may fade in secondary cities, if a recession unfolds.
Real Estate Interest Rates Forecast
While mortgage rates recently dipped below 7%, most analysts expect rates to remain elevated in 2024, likely averaging over 6.5% for the year. The Federal Reserve’s ongoing fight against inflation and plans for further rate hikes imply continued upward pressure on mortgage rates. Borrowing costs are not expected to return to 2020-2021 lows in the foreseeable future. Yet with inflation gradually easing, the Fed may moderate interest rate policies by late 2024. If so, real estate rates could dip slightly, perhaps falling just below 6% on average. But for 2024 overall, buyers will likely face mortgage rates exceeding recent historical norms.
Final Thoughts
The housing market downturn appears to be bottoming out, but a vigorous recovery still looks doubtful in the near term. High mortgage rates will continue limiting affordability, while nudging more prospective buyers to rent rather than buy. Investors are retreating as well, amid expectations for modest, if any home price appreciation. Still, tight inventories and steady job growth underpin demand. Barring an economic slump, sales should trend higher this year. While 2024 is unlikely to match the heated seller’s markets of 2020-2022, home values will probably hold relatively firm rather than nosedive. A gradual rebalancing of supply and demand could restore stability.
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