According to Freddie Mac, mortgage rates have decreased to the lowest level since May 2023. “This is an encouraging development for the housing market and in particular first-time homebuyers who are sensitive to changes in housing affordability. However, as purchase demand continues to thaw, it will put more pressure on already depleted inventory for sale.” The 30-year fixed-rate average now sits at 6.6%, a decrease from 7.79% in October 2023.

Source: Freddie Mac (January 2024)

Connie Kim of HousingWire comments on the data, highlighting that Fed officials project a rate decrease to a median of 4.6% by 2024. Over 57% of investors have priced in at least a quarter-point cut in March, but the percentage has decreased from last week. Fed Governor Christopher Waller advised caution with lowering interest rates, though he acknowledged that cuts are likely this year.

Fannie Mae expects rates to fall below 6% in 2024, according to a report released by its Economic and Strategic Research (ESR) Group. In 2024, the housing market is expected to return to a more normal balance after significant fluctuations in mortgage rates and key housing market measures. The ESR Group predicts a decrease in mortgage rates below 6%, boosting refinance volumes, which are already rising.

Doug Duncan, Fannie Mae Senior Vice President and Chief Economist, comments:

“In 2024, we expect home sales and mortgage origination activity to begin a gradual recovery in the presence of a slow-growing economy…Inflation’s decline and the resultant Fed pivot to signaling future rate cuts rates lead us to believe that home sales and mortgage originations likely bottomed out in the second half of 2023 and that a gradual improvement is now underway. We expect mortgage rates to dip below 6 percent by year-end 2024 and for homebuilders to continue to add new supply, both of which should aid affordability…Overall, we expect 2024 to be a better year than 2023 for homebuyer affordability and the mortgage industry.”

Christopher Murray of Fox Business reports on how this rate drop will ease affordability. Although housing affordability has slightly improved, many households still can’t afford homes due to insufficient incomes, increasing insurance rates, and inflation. The average mortgage payment in the US in December 2023 was $2,361, which is $327 less than the all-time high in October. In 2023, only 15.5% of the homes on the market were affordable for an average American household, a decrease from 20.7% in 2022.

Construction slows

New home construction is slowing, according to new data reported on by Anna Bahney of CNN. According to Census Bureau data, the annual pace of new home construction slowed down, with housing starts dropping by 4.3% in December compared to the previous month. Despite a historic shortage of housing inventory and falling mortgage rates, starts fell to a seasonally adjusted annual rate of 1.46 million units in December, down from November’s pace of 1.56 million.

Hannah Jones of Realtor.com notes that although we saw a drop in construction, activity remains strong compared to a year ago.

“Though housing starts fell relative to November’s surge, single-family starts remained 15.8% higher year-over-year. Homebuilder sentiment inched higher in December and January as falling mortgage rates buoyed builder optimism. This month’s housing start data reflects this shift in sentiment as both overall housing starts and single family starts remained elevated year-over-year.”

Source: Realtor.com (January 2024)

Robert Dietz of the National Association of Home Builders (NAHB) reports that builder sentiment is rising. Builder confidence in newly built single-family homes rose to 44 in January, following two months of falling interest rates. Lower interest rates have brought buyers back into the market, improving affordability. However, the expansion of home building may cause supply-side challenges such as higher prices and shortages of lumber, lots, and labor.

Source: NAHB (January 2024)

Baby boomers

Dana Anderson and Sheharyar Bokhari of Redfin report on data showing that almost 3 out of 10 (28.2%) of large homes in the U.S. are owned by baby boomers with no children living with them. This is twice the rate of millennials with children, owning only 14.2% of large homes. Gen Zers with children own almost none (0.3%) of these large homes. Additionally, 7.5% of the country’s large homes are owned by baby boomers who live with three or more adults. This category likely includes adult children who live with their boomer parents.

Source: Redfin (January 2023)

Exacerbating the issue is Chris Clow of HousingWire highlighting reports that the current housing inventory does not meet the needs of an aging population who prefer to age in place. As people age, once suitable homes become inadequate due to cognitive or mobility impairments. Although renovations may help, it is a solution with limitations, according to Clow.

Young adults continue to move out of their parent’s homes following the pandemic boost in multi-generational living, according to Natalia Siniavkaia of NAHB. “Despite record high inflation rates, rising interest rates, and worsening housing affordability, young adults continued the post-pandemic trend of moving out of parental homes in 2022. The share of young adults ages 25-34 living with parents or parents-in-law declined and now stands at 19.1%.”

James Rodriguez of Business Insider reports that there is a wave of boomer homes that will come to market to benefit the younger generations. Baby boomers own almost $19 trillion worth of US real estate, more than double the amount held by millennials and $5 trillion more than Gen Xers. By 2040, the population of 80-plus-year-olds will have doubled, leaving millions of homes up for grabs. This could lower prices and create opportunities for younger generations. 

“Given that boomers are currently between 60 and 78…we should see a rise in the number of boomers leaving their homes around 2030. Gary Engelhardt, a professor of economics at Syracuse University who has studied the fate of boomers’ homes, told me he expects the bulk of the boomer generation to age out of the market between 2030 and 2040.”