Housing and Mortgage Market Outlook for 2024 by Freddie Mac

In the dynamic landscape of the U.S. economy, where inflation remains a prevailing concern, the trajectory of mortgage rates plays a pivotal role in shaping the housing market. Despite the robustness of the economy, the specter of inflation looms large, potentially extending the duration of higher mortgage rates.

Current Trends and Market Dynamics

According to Freddie Mac, in January, the housing sector experienced a slight uptick in home sales, buoyed by the decline in mortgage rates. However, the persisting issue of limited inventory, compounded by the phenomenon known as the rate lock effect, has hindered the volume of home sales.

Although homeowners’ insurance costs are on the rise, they pale in comparison to the substantial financial commitments associated with mortgage principal and interest payments.

The U.S. economic growth, as estimated by the Bureau of Economic Analysis, stood at 3.2% in the fourth quarter of 2023. While this reflects a marginal dip from the previous quarter, it exceeds the anticipated long-term growth projections. The moderation in growth can be attributed to declines in private inventory investment and federal government spending, offset to some extent by sustained consumer spending.

Residential investment, a key component of economic activity, maintained a positive trajectory, albeit at a slower pace compared to previous quarters.

Housing and Mortgage Market Performance

The reduction in mortgage rates, from an average of 7.4% in November 2023 to 6.6% in January 2024, injected some vitality into the housing market. Total home sales for January reached 4.66 million, reflecting a 2.9% increase from the previous month. However, this figure represents a 1.2% decline from January 2023 levels.

Existing home sales, constituting a significant portion of the market, witnessed a notable uptick, registering a 3.1% increase from December 2023. Despite this positive momentum, existing sales remain below the figures recorded in January 2023.

The availability of existing housing inventory saw a modest increase in January 2024, representing a 3.0 months’ supply at the prevailing sales pace. However, the median home price surged to $379,100, marking a 5.1% increase from the previous year and exacerbating affordability challenges for prospective buyers.

New home sales, though showing signs of resilience, were accompanied by a growing trend of builders resorting to sales incentives and price reductions to mitigate affordability concerns.

Home prices continued to exhibit strength, with the FHFA Purchase-Only Home Price Index reporting a year-over-year increase of 6.6% in December 2023, outpacing overall consumer price growth.

Mortgage rates, after a brief respite, resumed their upward trajectory in February, reaching an average of 6.8%. This upward trend was primarily driven by inflationary pressures and market expectations regarding the Federal Reserve’s policy stance.

Future Outlook and Implications

Banks, as per the Federal Reserve Board’s Senior Loan Officer Opinion Survey, have tightened lending standards across various loan categories. This tightening, coupled with expectations of deteriorating credit quality, could have implications for future mortgage lending and overall market dynamics.

In summary, while the stabilization of rates spurred activity in the housing market in January, challenges such as constrained inventory persist, posing barriers to sustained growth in home sales volumes.

Outlook for the U.S. Housing and Mortgage Market

According to Freddie Mac, the economic outlook for the United States remains positive, albeit with expectations of modest growth compared to previous years. This trajectory is anticipated to result in a slowdown in payroll employment growth alongside a marginal increase in the unemployment rate. Despite projections for eventual moderation, inflation is expected to persist above the targeted 2% level in the short term, fueled by the momentum of a growing economy.

Given these economic conditions, it is unlikely that the Federal Reserve will enact rate cuts until at least the summer, with the possibility of further delays if inflationary pressures persist. Consequently, treasury yields are expected to remain elevated in the near future, thus maintaining mortgage rates at heightened levels. Forecasts indicate that mortgage rates are likely to stay above 6.5% throughout the current and subsequent quarters.

The housing market continues to face challenges stemming from elevated mortgage rates and a dearth of available inventory for sale. However, there is optimism for a gradual recovery in home sales, particularly in the latter half of the year, as mortgage rates ease under a scenario where inflation approaches the target level. Nevertheless, the rate lock effect may impede the influx of homes onto the market, constraining the extent of this recovery.

Expectations suggest that upward pressure on home prices will persist, driven by an influx of first-time homebuyers into a market plagued by supply shortages. Consequently, forecasts indicate a projected increase in home prices of 2.5% in 2024 and 2.1% in 2025.

Under the baseline scenario, it is anticipated that the dollar volume of purchase origination will witness modest improvement in 2024 and 2025. Despite robust price growth, this optimism is tempered by factors such as a modest recovery in home sales and a rising prevalence of cash purchases, both of which are anticipated to limit significant growth in purchase origination volumes.

While projections indicate a potential drift downward in mortgage rates, the prospects for refinance activity remain limited. Many homeowners have already secured historically low mortgage rates, diminishing the incentive for refinancing. Consequently, total mortgage origination is expected to remain subdued for the majority of 2024, with modest increases anticipated toward the year’s end and into 2025.

Although the overall outlook remains optimistic, a degree of caution is advised, particularly considering the protracted battle against persistent inflation. Additionally, concerns regarding deteriorating credit quality could pose challenges to housing demand, although significant negative credit events are not anticipated under the baseline scenario.