2024 Real Estate Housing Market Predictions

Last year I started the year by saying the market was going to be all about inflation and it’s impact on interest rates, and that held true. We had a year of extreme volatility, the lowest home sales in over 3 decades, and interest rates peaked around 8% in October. However, since October’s peak, we’ve seen interest rates decline from 8% to under 7% in just a couple of months. In November, we even saw a rise in existing home sales after 5 months of decline, proving just how "interest-rate-sensitive" home buyers and sellers are.

Overall, this recent decline in interest rates has lead to an uptick in activity and we are seeing an increase in Mortgage applications, showings, buyer activity, and even prices. Here in Portland, I’ve recently experienced multiple offers, homes selling over list price, and homes selling in one weekend again. A really good sign after a somewhat slow and volatile 2023.

Prediction for 2024 is that this will be the "Year of the 5’s" 

• 5% Interest rates
• 5.5 Million in total home sales (inventory)
• 5% Home Price Appreciation

Interest Rates - How we get to 5%

First let’s talk about Interest Rates and why experts predict we’ll be back in the 5’s soon. Two things determine the mortgage interest rate: the 10 year treasury yield and the spread above it. For the last 50 years the 30 year mortgage rate has moved in unison with the 10 year treasury yield.  The average spread has been 1.72 almost every single year over these 50 years. Right now, the spread is out of whack! It widens during times of economic or geo political uncertainty (what’s happening in the Middle East, the War in Ukraine, etc) The geo-political uncertainty is still there, but the economic uncertainty is starting to settle. 

Fun Fact: Over 60% of economists believe we will NOT experience a recession and are headed for a “soft Landing”.

As inflation gets more and more under control, the spread between the 10 Year Treasury yield and the 30 year mortgage rate will get smaller. If the spread gets smaller, interest rates will be lower. Right now it’s at 2.79. If the yield is 4.13 and the spread reduces from 2.79 closer to 1.72, that will lower mortgage interest rates and if it reduces to 1.86 based on the current yield, that gets us to 5.99. Add to that widespread speculation that the fed will make additional cuts to the 10 year, and we have a very clear path towards rates in the 5’s.

To be clear, rates will NOT get back to pandemic lows, nor is this something any of us should want! Seriously, if rates drop back to the 3’s it’s because something is very, very, very wrong with the world. It took a global pandemic and complete shut down of the world for rates to drop as much as they did.  I for one hope to never see rates in the 3’s in my lifetime again.

Inventory - How we get to 5.5 Million in Home Sales

First, let’s talk about the “Lock-in Effect” which refers to homeowners and mortgage holders, that are locked into such a great interest rate that they refuse to sell or move because of it. My guess is most of you can relate to this sentiment. In fact, 78.7% of Mortgage holders have rates less than 5% and for the last few years, very few home owners with a sub 5% interest rate have been wiling to give that up to move.  This is one of the biggest reasons that inventory has remained so low and overall transactions have been down. In fact, the seasonally adjusted annual rate of home sales was only 3.78 million units in December of 2023, which is even lower than the annually adjusted home sales in December of 2010 and 2011, during the great recession. I had to go back to December of 1991 to find a worse year. Another reminder to hug your Realtor, because last year was tough!

Ready for some good news? Well, many believe we may be at our peak of the “lock in effect”. Ultimately life happens. There are plenty of instances of young couples in 1 bedroom condos that are pregnant and need more space, just as there are unhappy couples that have been waiting to go their separate ways. In either of these instances, this will to lead to home selling and buying transactions.

We also have move-up or lifestyle sellers that might be coming to terms with the fact that 3% and 4% mortgage rates aren’t returning anytime soon. As they come to terms with this, we will see them ready to sell their homes. Some might say, well if all these people decide to sell all at once won’t we flood the market with inventory leading to a crash in housing prices? No, we won’t and it’s simply because most home sellers are also home buyers because people need a place to live.

FUN FACT: When Buyers were asked what the top 3 reasons were they paused their home search, 72% said mortgage rates, 34% said inventory, 17% said affordability. So yes, affordability is still a problem and that 17% may still struggle this year. But for the 72% that paused because of interest rates, we can and should expect a flood of activity if the fed does in fact cut interest rates this year. We’ve already felt a flurry of activity with the interest rates back in the 6’s, so I can only imagine how much busier we will feel when the first digit turns into a 5.

Home Prices - How we get to 5% growth

This year, most experts are predicting home price growth to “normalize” and over the last 42 years, “normal” annualized home price appreciation has been 4.92%. Home price appreciation will vary by city, neighborhood, type of property, price point, etc but the headline here is that experts are predicting GROWTH!

That’s right, I said growth. Home prices are NOT expected to Fall, but they are down from their peak in many cases. When I’m reviewing comps with my sellers, comps being short for a competitive analysis, they are often confused why homes prices have come down from their peak in Spring / Summer of 2022. They inevitably had a neighbor that “cashed" in at the high, and are disappointed they can’t sell at that same price. The reason for this downward shift is interest rates. 

FUN (not so fun) FACT: The average price for a home in Cedar Mill, Oregon is about $750,000. Assuming a 20% down payment and $600,000 loan amount on a 30 yr fixed conventional mortgage, here is what that payment looked like over the last few years:

- April 2022, 4.75% Interest Rate: $3,130 / mo

- Fall 2023, 8% Interest Rate: $4,403 Monthly Payment

- Now(ish) 7% Interest Rate: $3,992 / mo

The average monthly payment on a home in Cedar Mill grew by nearly $1,273 (difference between April 2022 and Fall 2023), which equates to a difference of over $212K in lost buying power. This loss of buying power doesn’t equate dollar for dollar to loss in home value, but it does severely limit the buying pool and thus affect value.

2020 and 2021 were unicorn years with interest rates around 3%. In 2022, Interest rates jumped from 3% to 8% in a matter of months. There was a rush to buy the first half of the year prior to the interest rate hikes, and once interest rates hit the 6’s, we saw a huge cooling off of the market. Homes sat stagnant for months when they were used to selling in days, and price cuts became necessary to get homes sold. Those price cuts really just “normalized’ what had been a false peak and we have seen growth since then. 

While pessimists and doom-and-gloomers spent the last few years predicting we were heading to another crash, here we are in 2024 with a positive outlook. Real Estate remains one of the best ways to build wealth and has shown consistent, proven growth over time. Call me or email me if you’d like to learn more about the Real Estate Market or are ready to make a move.