The housing market, once frozen in the grip of economic uncertainty, is beginning to thaw according to a recent report by JPMorgan. Despite enduring challenges, optimistic indicators are suggesting a gradual rebound in housing activity. One significant factor contributing to the stagnant housing market has been the “mortgage lock” effect.
This phenomenon has kept households with locked-in low mortgage rates from moving, fearing higher rates. Consequently, the supply of existing homes for sale has been severely limited. However, recent data suggests that this trend is starting to reverse. Seasonally adjusted existing homes for sale have been on a steady upward trajectory since last spring, indicating a thawing of supply constraints.
Moreover, there's relief on the horizon with new home supply underway. With 1.6 million units currently under construction and housing completions reaching their highest levels in 17 years as of February, the outlook for increased supply is promising. Factors such as improved homebuilder sentiment, robust hiring rates, and a chronic undersupply of housing all contribute to a positive forecast for construction activity in the coming years.
Resilient Demand Side of Housing Market
On the demand side, the housing market has displayed resilience. Despite recent strong housing completions, homeowner and rental vacancy rates remain at multi-decade lows. Contributing to this resilience may be a surprising immigration boom, which has raised the bar on housing units needed for population growth.
Modest declines in mortgage rates have also stimulated activity and improved home affordability. The current 30-year fixed mortgage rate stands at 6.9%, down from its peak of 7.8%. Further declines are anticipated, with Fannie Mae predicting rates to reach 6.4% by the end of 2024 and 6.2% by the end of 2025. Additionally, the recent settlement on realtor commissions by the National Association of Realtors (NAR) may lower home prices by reducing transaction costs over the long term.
Gradual Transition and Economic Resilience
For the average household, the “mortgage lock” has provided a layer of immunity to higher rates. Despite the gradual fading of this immunity, improving real wages and strong balance sheets suggest that consumers should be able to weather incremental exposure. Furthermore, the recovery in housing market activity is expected to be gradual, with resilient supply and demand dynamics indicating that it is not a source of vulnerability for the economy.
While a recession is not anticipated this year, should one occur, the lack of private sector imbalances suggests that it is unlikely to be severe. As more new homes enter the market, albeit a smaller portion of the overall inventory, the housing market is poised for a period of transition and potential growth.
Overall, while challenges remain, the housing market is showing encouraging signs of recovery. With a thawing supply, resilient demand, and gradual economic transition, the outlook for the housing sector appears optimistic.
