The allure of homeownership continues to hold strong, especially for millennial first-time buyers. But unlike the red-hot housing market of recent years, navigating the 2024 housing landscape requires a dose of cautious optimism. Freddie Mac's insights offer a valuable roadmap to understanding the current trends and what they might mean for the rest of the year.
Current Housing Market Trends
Following a period of stability in mortgage rates during the initial months of the year, the housing market encountered a slowdown in March. This deceleration was primarily attributed to a rebound in rates, resulting in a 2.7% decrease in total home sales compared to February. Notably, existing home sales bore the brunt of rising rates, experiencing a decline of 4.3% from February and 3.7% from March 2023.
Conversely, new home sales for March exhibited growth, increasing by 8.8% from the previous month to an annualized rate of 693,000 units. This shift towards new home purchases can be attributed to the dwindling supply of existing homes coupled with escalating prices, prompting buyers to explore alternative options.
Despite the overall moderation in the housing construction sector, as indicated by a 14.7% decrease in total starts in March, homebuilder confidence remained steady with a Housing Market Index above the threshold of 50, signifying positive building conditions.
Price Trends and Mortgage Rates
The FHFA Purchase-Only Home Price Index for February reported a 1.2% month-over-month increase, contributing to a robust year-over-year house price growth of 7.0%. This upward trajectory in house prices can be attributed to the persistent imbalance between supply and demand, with limited inventory exerting upward pressure.
Meanwhile, mortgage rates experienced an uptick in April, averaging 6.99% for the month and reaching 7.17% by the month's end. This escalation in rates prompted a decline in mortgage activity, with overall activity down 1.8% month-over-month and 10.4% year-over-year. Refinance activity saw a decrease of 3.3% compared to March, while purchase applications were down 2.7% month-over-month.
Homeownership Trends
The homeownership rate in Q1 2024 witnessed a slight decline to 65.6%, reflecting a marginal decrease from previous quarters. Despite the increase in total housing stock, particularly in occupied units, a notable portion of this growth stemmed from renters rather than homeowners.
Furthermore, vacancy rates, both for rental and homeowner properties, remained low, highlighting the persistent undersupply of housing units. To address this shortage and alleviate pressure on housing markets, the U.S. would need to add an additional 1.5 million vacant homes for sale and rent. However, it's essential to acknowledge that this metric may underestimate the total housing shortage, as it does not account for latent demand and non-market housing vacancies.
Housing Market Predictions for 2024
Despite the strong housing demand, Freddie Mac's housing market outlook is tempered by the persistent lack of inventory available for sale. Under the baseline scenario, there is an anticipation of improvement in home sales compared to 2023, albeit by a narrow margin. This expectation is rooted in the rate lock-in effect, which delays existing homes from entering the market.
However, the outlook on the mortgage origination market is clouded by the expectation of low sale volumes. With the projection of mortgage interest rates remaining higher for an extended period, there is anticipated modest growth in mortgage origination volumes, supported by elevated home prices. Nevertheless, the combination of higher interest rates and limited inventory poses a potential limitation on purchase originations. Furthermore, a decline in refinance origination volumes is expected as homeowners have already taken advantage of low rates, presenting a challenge in the refinance market.
While the outlook remains generally positive, there are emerging risks, particularly stemming from inflation. Over the past year, housing inflation has contributed significantly to overall inflation gains. In an environment characterized by continuous growth in home prices, inflationary pressures may persist for an extended duration.
Under a high inflation scenario, the trajectory of interest rates will likely remain elevated, adversely affecting consumer spending behavior and credit performance. Consequently, this could lead to a slowdown in economic growth, posing challenges to the housing market and broader financial landscape.
How Can You Navigate This Market as a Potential Homebuyer?
Meticulous planning is paramount. Factor in the higher mortgage rates when determining your budget and be realistic about your affordability limits. Consider starting your homeownership journey with a smaller property if affordability is a major concern. Remember, even in a challenging market, good deals can still be found.
Stay patient, collaborate with a qualified realtor to stay informed about new listings, and be prepared to act quickly when the right house comes along. The American dream of homeownership might require a little more effort in 2024, but with a strategic approach and unwavering determination, it's still a dream within reach.
While the housing market may encounter challenges in the near term, including supply constraints and interest rate fluctuations, addressing these issues through strategic interventions and policy measures can pave the way for a more balanced and sustainable market in the future.
