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Will Housing Prices Drop in 2024 & What It Means for Investors

Will Housing Prices Drop in 2024 & What It Means for Investors

Agnes A. Gaddis

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The US housing market in 2023 is a picture of contrasts. While some regions are experiencing a softening of home prices, the housing affordability crisis continues to persist. Factors such as scarce housing supply, high mortgage rates, and soaring sales prices contribute to this landscape, posing challenges for investors who must carefully navigate these complexities. The big question remains: will housing prices drop in 2024?

To win as an investor in today’s market, it’s essential to be well-informed and adaptable. Keeping a finger on the pulse of market trends and understanding the intricacies of the housing market is vital.

In this article, we’ll dive into the current state of the housing market and explore what 2024 holds for investors. We’ll also discuss the possibility of a price decline, its implications for investors and provide valuable insights on how to navigate the market successfully in 2024 and beyond.

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Understanding the Current Housing Market

In order to understand if and when housing prices will drop, it’s important to a gain a comprehensive understanding of the 2024 housing market by exploring the current trends.

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Current housing market trends

1. Weak housing market activity

The housing market’s overall activity has been notably sluggish due to a confluence of factors. High mortgage rates, elevated home prices, and limited housing inventory form a trifecta of challenges that continue to exacerbate the housing affordability crisis. Additionally, the specter of high inflation and interest rate hikes further dampens market sentiment.

Illustrating this, recent data from the National Association of Realtors (NAR) reveals a significant year-over-year decline of 16.6 percent in existing home sales. This underscores the challenges currently affecting the housing market.

2. Resilient prices

Will housing prices drop? Despite certain overheated markets recording price declines, home prices have remained relatively stable. According to the S&P CoreLogic Case-Shiller Home Price Index, home prices fell earlier in the year but have since resumed rising. They are now just 1% below the peak they hit in 2022.

According to The Motley Fool, the median home sales price in the United States was $416,100 as of the second quarter of 2023, down 3% from the first quarter of 2023 when the median home sales price was $429,000. This shows that while prices have fallen, the decline has not been drastic, and the market has avoided a crash.

It is worth noting that local markets in the East have largely begun rebounding, while the West has seen some of the most dramatic price declines as its once booming housing markets reckon with interest rates now hovering over 7%. This shows that while the housing market has problems, widespread crashing prices isn’t one of them.

3. Mortgage rates remain high

Due to ongoing economic uncertainty and the Federal Reserve’s aggressive stance against inflation, mortgage rates have remained high. The current average rate for a 30-year mortgage hovers around 7%, creating a disincentive for homeowners who purchased their properties before 2022 to consider moving. This reluctance stems from the desire to hold onto historically low rates, ensuring manageable payments for years to come.

As of May, approximately 85% of mortgage holders enjoyed interest rates of 5% or lower, with nearly half benefitting from rates as low as 3.5% or less, according to data from Black Knight, a prominent mortgage technology provider. Many homeowners opted to safeguard their financial future by refinancing at rock-bottom interest rates during the COVID-19 pandemic. This trend underscores the significant impact of interest rates on housing market dynamics.

4. Inventory is still at historic lows keeping prices high

The current state of the housing market is characterized by a critical issue: limited supply, which has been a persistent problem preceding the pandemic. In 2019, there was already a shortage of approximately 4 to 5 million housing units, resulting from rapid population and job growth outpacing new construction.

This scarcity intensified during the COVID-19 real estate surge, driven by historically low interest rates that prompted many to enter the market. Furthermore, as homeowners clung to their locked-in low rates, the shortage worsened when mortgage rates rose.

As of July 2023, housing supply remains notably low, with only 1.11 million existing homes available for sale, representing a meager 3.3-month supply. This falls significantly short of the typical 5 to 6 months required for a balanced market, contributing to the current high prices in the housing market.

5. Homeowner affordability is low

The average mortgage rate is projected to remain between 6.5% and 7.5% for the foreseeable future. This makes affordability a huge challenge for many prospective homebuyers. For instance, individuals with monthly budgets of $3,000, who could have purchased a $500,000 home just a year ago, now find themselves limited to homes priced at $429,000.

First-time buyers, in particular, are facing the brunt of this affordability crisis, as the cost of starter homes continues to rise. This trend makes homeownership increasingly unattainable for those grappling with limited down payment savings and incomes that struggle to keep pace with the escalating monthly expenses.

6. Home construction is recovering

According to recent data from the Department of Housing and Urban Development and the Census Bureau, sales of newly built single-family homes jumped in May to the highest level since February 2022, marking a 12.2 percent increase compared with the previous month. This suggests that there is a growing demand for new homes, which is driving the recovery of the home construction industry.

Another factor contributing to the recovery of home construction is the lack of supply on the existing sales market. With many homeowners reluctant to move, buyers are becoming increasingly reliant on new construction. This means that builders benefit from the lack of supply, as they can sell their newly built homes at good prices.

It’s worth noting that builder confidence, as measured by the NAHB housing market index, is currently at a 5-month low of 45. While this may seem like a negative indicator, builders are still motivated to sell their homes, even in the face of high mortgage rates. In fact, many builders are offering perks like cheaper loans or other discounts to ease the pain of higher mortgage rates, which is making their homes more attractive to potential buyers.

Will My House or Investment Property be Worth Less in 2024?

It’s unlikely that your house or investment property will be worth less in 2024. While some experts predict a slight drop in housing prices, it’s expected to be a small decrease of around 2%. In addition, lending standards have become more robust since the 2008 market crash, making it less likely for prices to fall drastically.

According to a recent Morgan Stanley report, housing prices are expected to finish 2023 flat compared to 2022 and then fall by 2% in 2024. However, other experts, such as Zillow economists, predict a more optimistic outlook, with a 4.9% increase in housing prices between August 2023 and August 2024. It’s important to note that these predictions are based on current trends and may change depending on various factors, such as changes in interest rates, economic conditions, and market demand.

2024 Housing Market Predictions

Before we answer the question “will housing prices drop,” let’s look at some predictions for the 2024 housing market.

1. Mortgage rates will cool slightly

A key prediction for the 2024 housing market is a slight cooling in mortgage rates, which should offer some relief to homebuyers and investors. A decline in rates is expected due to general consensus pointing to rates dipping back below 7%, as seen in the following forecasts:

  • Fannie Mae anticipates that 30-year mortgage rates will fall within the 6.3% to 6.8% range in 2024.
  • The National Association of Realtors (NAR) predicts that rates will stay closer to the 6% mark, while
  • The Mortgage Bankers Association (MBA) takes a more aggressive approach, forecasting that 30-year mortgage rates will plummet to 5.4% by the end of 2024.

Additionally, the Federal Reserve, as of their June Monetary Policy Report, projects that the federal funds rate will lie between 4.3% and 4.6% in 2024. This supports the prediction that mortgage rates will decline.

Federal Reserve Will Housing Prices Drop in 2024 chart

Image Source: FederalReserve.gov

2. YOY home sales activity will increase marginally

According to Fannie Mae’s forecast, total home sales in 2024 are expected to reach 4.9 million, a marginal increase from the projected 4.8 million home sales in 2023. This prediction is based on the assumption that retreating mortgage rates will bring more buyers and sellers to the market.

Fannie Mae also expects total mortgage originations to increase from 1.56 million in 2023 to 1.88 million in 2024. This suggests that more buyers will re-enter the market.

3. There'll be a slight easing in low inventory

The scarcity of available housing has been a significant driver behind recent soaring home prices. However, change is on the horizon as new home construction gains momentum.

Robert Dietz, chief economist of the NAHB, said in a January NAHB press briefing, “With interest rates projected to normalize in the second half of 2023 as the Federal Reserve taps the brakes in its fight against inflation, the pace of single-family construction will bottom out in the first half of 2023 and begin to improve in the latter part of the year. This forward momentum will lead to a calendar year gain for single-family starts in 2024.”

Data from Reuters show that housing starts reached a seasonally adjusted annual rate of 1.631 million units in May 2023, a 13-month high. While the adjustment may appear modest, it signifies a positive trend in new construction activity.

Image Source: Reuters

4. Apartment construction boom anticipated

An important trend that could potentially influence whether 2024 will be a buyers market is the anticipated apartment construction boom, spurred by the momentum of the pandemic building period. In the last three years alone, the industry witnessed the introduction of 1.2 million apartments, creating an unprecedented surge in available rental properties.

Rent Cafe US New Apartment Deliveries

Image Source: Rent Cafe

The statistics indicate that the construction trend is set to continue into 2024, with developers projected to open up an additional 460,860 rental units by year’s end, marking a peak year for construction.

However, the distribution of these new buildings has not been uniform. An astounding two-thirds of apartments constructed during this boom are concentrated in just 20 high-growth metros, areas that account for roughly 41% of America’s total renter population. Consequently, in many regions, the influx of new apartments only marginally impacted the existing supply. Furthermore, approximately 89% of the apartments completed in the past three years are high-end, targeting upper-middle- and high-income renters.

Will housing prices drop - Rent Cafe Top US metros

Image Source: Rent Cafe

Looking beyond 2024, the number of newly built apartments is forecast to decrease by 15% year-over-year, from 484,000 in 2024 to 408,000 in 2025. New completions are predicted to reach their lowest point in 2026, with about 400,000 units. However, as per Yardi Matrix estimates, apartment construction will recover gradually in 2027 and 2028.

Will Housing Prices Drop in 2024?

Yes, according to forecasts from experts, housing prices are expected to drop in 2024, but the decline will be relatively marginal.

House price drops are expected as affordability slowly adjusts back to its long-run averages and inventories inch away from the multi-decade lows experienced recently. Morgan Stanley forecasts that house prices in 2023 will conclude the year on par with 2022 before experiencing a decline of 2% in 2024.

Similarly, experts at Fannie Mae anticipate that prices will remain elevated for a longer period than initially expected. High demand and a consistent shortage of homes for sale contribute to this sustained level. Influential factors such as Baby Boomers aging in place and Generation X-ers taking advantage of historically low rates compound this scenario, keeping housing supply at historically low levels.

Even though homebuilders are gradually adding to the existing supply, a prolonged period of inadequate homebuilding suggests that the supply-demand imbalance will likely persist. Fannie Mae doesn’t foresee a crash in home prices but predicts a decrease of around 3.4% from December 2022 to December 2024.

As mentioned in our housing market predictions, housing inventory shortages might persist beyond 2024 due to labor shortages, restrictive zoning and low builder confidence

What Will Mortgage Rates Be in 2024?

In 2024, 30-year mortgage rates are currently projected to fall within the range of 5.4% to 6.8%.

The recent prevalence of high home prices and 7% mortgage rates has left many potential homebuyers feeling excluded from the market. A U.S. News survey conducted in spring 2023 found that two-thirds of prospective homebuyers are delaying their purchases, waiting for rates to decrease before committing to a home.

Should mortgage rates fall below 6% as some predictions suggest, a considerable number of these hesitant buyers may re-enter the market.

Factors Leading to a Possible Decrease in Housing Prices

Understanding the conditions that could lead to housing prices going down and a shift to a buyer’s market requires an analysis of various influencing elements:

A. Economic uncertainty and recession fears

1. After-effects of the COVID-19 pandemic on the economy

The pandemic not only spurred a shift to remote work and led to the rise of new tech hubs and rural ‘Zoom towns’, but it also exacerbated the housing affordability crisis nationwide.

At the onset of the pandemic, high demand and incredibly low supply caused home prices to skyrocket. Recession-induced low mortgage rates coupled with increased demand for housing due to remote work led to a housing demand surge, while the supply remained bottlenecked due to slowed or halted developments.

However, as high interest rates have calmed the heated post-pandemic housing market, inherent economic uncertainties about housing prices have increased. Experts anticipate that this uncertainty, coupled with a cooler housing market, could precipitate a modest housing price correction. But unlike the dramatic crash of 2008, this would represent a long-term adjustment to the recent price increases spurred by the pandemic-induced market dynamics.

2. Global trade tensions and geopolitical risks

Intense geopolitical risks concerning the war in Ukraine and the strained relationship between the U.S. and China have created an unsettling economic atmosphere. These events have affected supply chains, fueled inflation, and ramped up the prices of home building products significantly.

An escalation in construction costs owing to higher tariff rates, as shown by a study from the American Action Forum, can lead to affordability issues, impacting demand negatively.

B. Affordability challenges

1. Rising home prices vs. stagnant wages

One of the critical factors contributing to the potential decrease in housing prices revolves around the growing challenge of affordability. Over the last 50 years, when adjusted for inflation, home prices have skyrocketed by 118% since 1965, while income has inched up by a mere 15%, as reported by a study conducted by online brokerage Clever Real Estate, drawing from Census data. The imbalance between rising home prices and stagnant wages is a prominent factor shaping housing market dynamics.

2. Increasing mortgage rates and affordability

The surge in mortgage rates directly impacts housing affordability, influencing both individuals and businesses in the real estate sector. As interest rates rise, mortgage demand from potential homebuyers and investors decreases. This reduction in affordability has a dual effect on the housing market.

Firstly, it limits housing supply as homeowners become less inclined to sell their properties. Many homeowners choose to retain their existing mortgages at lower interest rates, reducing the number of available homes for sale. This constrained supply can contribute to housing price increases.

Secondly, rising mortgage rates diminish the purchasing power of consumers. This could flatten housing demand, as potential buyers either delay their purchases or seek more affordable properties. The complex interaction between mortgage rates and affordability would play a pivotal role in shaping the trajectory of housing prices in the coming year.

3. Decrease in first-time homebuyers and its impact on the market

First-time buyers, often seen as a crucial propellant in the housing market, have been largely pushed to the sidelines due to persistently high prices, escalating mortgage rates, and low inventory. According to the National Association of Realtors (NAR), the proportion of first-time buyers is the lowest it’s been since NAR began tracking this data, accounting for only 26% of purchases.

The reduction in first-time buyer activity affects the net supply of owner-occupied homes on the market, since a first-time buyer isn’t selling a home while purchasing one, unlike repeat buyers. Increased first-time buyer activity typically contributes to rising home prices, a reduction in first-time buyers can consequently contribute to house prices dropping.

Rise 2021 FTB Purchase Concentrated GSE Mortgage Chart

Image Sources: New York Fed Consumer Credit Panel (CCP) / Equifax; Liberty Street authors’ calculations.

C. Oversupply in certain markets

1. Shift towards renting and the rise of build-to-rent housing

The significant shift towards renting, coupled with the rise in the build-to-rent (BTR) housing sector, presents a key factor that could potentially put downward pressure on housing prices.

Rising house prices and escalating debt levels have painted homeownership as an elusive dream for millennials, in spite of entering their prime house-forming years. The housing difficulties have increased the demand for larger rental units, as many ask, “Will housing prices drop?” Given additional factors such as changing lifestyle preferences, increased mobility, and affordability challenges, a trend is crystallizing: more people lean towards renting over owning homes.

The BTR sector plays a pivotal role in this shift – it experienced robust growth in 2022, with a record-breaking 47% increase in new home completions compared to the previous year. The fact that 44,700 new BTR homes are currently under construction also indicates a sustained growth trend in this sector.

Build to rent 10 year evolution Coldwell Banker

Image Source: Coldwell Banker

This ongoing trend could potentially contribute to less demand for housing purchases, leading to a decrease in housing prices.

2. Potential for a supply glut in certain regions

In areas experiencing heightened construction activity, such as Dallas and Austin in Texas, and Boise, Idaho, housing supply could outstrip demand. Tejas Joshi, a director at Yieldstreet, predicts that this oversupply could necessitate “aggressive” price reductions in these markets, leading to potential declines of up to 20% in home prices.

Right now, even in markets where demand for housing remains strong, such as Dallas due to its employment opportunities, price reductions have increased with new supply entering the market.

What Do Declining Housing Prices Mean for Investors?

Now we’ll explore the impact of declining housing prices on investors and provide guidance on how to protect your portfolio.

A. Impact on property values and returns

1. Potential for decreased property values and losses

According to a recent Redfin report, investors incurred losses on approximately 13.5% of homes sold in March. This is significantly higher than the overall 4.8% of U.S. homes that sold at a loss.

Investors need to adopt astute strategies to safeguard their returns during times of price drops. A focus on buying properties in regions with stable job markets, such as tech hubs or university cities, could act as a hedge against high vacancies and property value decreases. Here are some of the best places to buy properties for cash flow in 2024.

2. Shift towards value investing and distressed assets

A decrease in housing prices might temporarily affect existing investments, but it can also pave the way for unique investment opportunities in distressed assets.

A declining market can uncover bargains in properties experiencing financial or operational stress, hence classified as distressed assets. While these assets come with their own set of risks, thorough due diligence could reveal significant potential returns.

Investors can adopt an opportunistic approach, capitalizing on this situation by buying these properties at lower prices early in the downturn phase. The aim will be to transition these assets from their current distressing state during the recovery phase, with an eventual plan to liquidate them during the expansion phase when the property reaches a more desirable financial status. It’s an approach that requires patience, with holding periods often falling between two to four years.

B. Changes in financing and lending

1. Tighter credit standards and higher interest rates for investors

During a down market, declining housing prices prompt lenders to consider real estate investments riskier.

Lenders, in an attempt to mitigate risks associated with falling property values, implement more stringent credit standards and raise interest rates. This makes financing more expensive for investors. This increase in borrowing costs for investors can put additional downward pressure on home prices.

1. Diversification across asset classes and geography

Diversification is a strategy that involves spreading investments across distinct assets, strategies, or asset classes to mitigate risk exposure. This approach works on the principle of balancing potential losses from any single asset with gains from others, thereby buffering against short-term volatility and potentially enhancing long-term value.

For real estate investors, this could mean diversifying their portfolio across different property types and locations. Broadening investments across a variety of markets can lessen exposure to localized market conditions, offering protection against downturns in any single market. Further, engaging with different investment vehicles can spread risks over a wider asset and structure range, reducing reliance on a single property or investment.

2. Focus on cash flow and yield rather than appreciation

In the face of market corrections, property values tend to decrease, yet rents often remain stable and may even increase. When investments are made solely banking on potential property appreciation, it falls into the realm of speculation – a risky move considering the unpredictable nature of the real estate market. So the right question to ask isn’t “when will it be a buyers market?”. Rather, it’s “how do I make the most of this current market?”

Prioritizing rental cash flow and yield instead offers a more reliable income stream, irrespective of the property’s market value. Investors should aim to evaluate prospective properties based on current rental incomes, using tools like rental property calculators to gauge expected cash flow and returns on investment (ROI). Even if property value declines over time, consistent rental income can ensure sustained ROI, making the investment profitable in the long run.

3. Adapt investment tactics and stay flexible

Stay informed about economic changes, housing market trends, interest rates, and other factors affecting your real estate investments. This would allow you to make timely adjustments as needed. Keeping up-to-date with market shifts allows for faster adaptation and more informed decision-making.

Additionally, regularly review and reassess your investment goals, considering current market conditions, to ensure they remain realistic and achievable.

So will house prices go down in 2024? Probably. We might see house prices dropping marginally across the US but prices in many markets will remain high. Lastly, check out our comprehensive deep-dive into interest rates and what to expect in the coming years.

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