Spring home-buying season is here. Amid historically low housing stock, a combination of still-high mortgage rates and home prices continues to put homeownership out of reach for many—especially first-time buyers.
Owning a home has many virtues. It creates stability for a family, supports longer-lasting connections in a community, and is a store of wealth for the homeowner. For these reasons, homeownership has been both a personal aspiration and priority for generations.
Experts have referred to the pre-pandemic housing market as hot while the 2023 market remained cold due to the aforementioned issues. The 2024 market appears to be better, but still doesn’t offer just the right conditions for homebuyers.
Essentially, all of 2023’s chilling headwinds still remain in the current housing market.
Elevated mortgage rates, out-of-reach home prices, and record-low housing stock continue to make for a perfect unaffordability recipe. Soaring interest rates, in addition to the high prices, means a large proportion of would-be buyers are likely unable to find a home they can afford, while current homeowners hold onto their houses since they would have to pay a higher interest on a new home.
Recovery Prescription: More Homes for Sale
For the housing market to recover, several conditions must change.
One thing that must change is that the inventory of homes for sale must increase. Housing inventory is the total number of active listings plus pending sales at the end of the month. If inventory is rising, there is less pressure for home prices to increase.
Total housing inventory rose 5.9% from January to February 2024, with 1,070,000 units available. Inventory was up 10.3% in January 2024 compared to January 2023, giving buyers more choice, and easing the pressure of a historically tight market. This leaves existing home stock at a scant three-month supply at the current sales pace, according to the National Association of Realtors (NAR). Many experts say a balanced housing market has a four-to-six-month supply.
This additional inventory, should it continue to increase, could begin to ease the upward pressure on home prices, perhaps helping them to level off or settle back from peak or near-peak levels. For prices to continue easing, mortgage rates would need to decline to a more normal level of the upper 4% to lower 5% range.
Existing home sales, the majority of purchases, surged 9.5% in February 2024 from the month before to a seasonally adjusted annual rate of 4.38 million, marking the first time in more than two years that sales increased for two consecutive months, according to the (NAR). The momentum in sales during the last two months comes just ahead of the spring selling season and follows one of the most sluggish periods for the housing market in recent history.
Meanwhile, sales of new homes continued to lure buyers frustrated with the lack of resale inventory. Sales of newly constructed single-family houses were up 1.5% in January 2024 from December 2023 and 1.8% annually, according to the latest U.S. Census Bureau and Department of Housing and Urban Development data. The median price for a new home in December was $420,700, widening the gap between existing home prices to $41,600 amid steady demand.
NAR’s Pending Homes Sales Index rose 1.6% in February from the month prior even as mortgage rates approached 7% by the end of the month. Pending transactions declined 7% year-over-year.
On Affordability: Bleak House
The home affordability outlook appears grim amid rising home prices and low inventory. Though down from its 2023 high of 7.79%, the average 30-year fixed mortgage rate in 2024 remains well over 6% amid rising home values. According to data from its first-quarter 2024 U.S. Home Affordability Report, property data provider Attom found that median-priced single-family homes remain less affordable than the historical average in over 95% of U.S. counties. As a result, homebuyers continue to face affordability challenges.
Prices increased once again in January 2024, according to the NAR, which reports that median existing-home prices were up 5.1% over last year—the seventh month in a row of year-over-year jumps. In another reflection of ongoing increases, the S&P CoreLogic Case-Shiller Home Price Index had increased for nine consecutive months before finally inching down a tiny bit in November 2023, while the December 2023 drop was only a minuscule 0.4%.
The median national price of an existing home rose 5.7% in February 2024 from February 2023, up to $384,500, a bigger annual rise than in the prior month. The 2024 number was the highest median home price for any February on record. Experts anticipate a slower rise in 2024 home prices compared to recent years. Moreover, the fluctuation will vary regionally and depend strongly on local market supply.
The affordability squeeze is exacerbated by the fact that mortgage rates have more than doubled since August 2021. Monthly mortgage payments are back on the rise, with the median payment in January 2024 climbing to $2,671, up from $2,361 in December 2023, according to Redfin. Sales dipped 3.3% from a year ago.
Lenders began the foreclosure process on 21,770 properties in January 2024, up 6% from the previous month and 5% from January 2023. Despite foreclosure activity trending up nationally, experts generally don’t expect to see a wave of foreclosures in 2024. Foreclosure activity is still only at about 60% of pre-pandemic levels and isn’t likely to be back to 2019 numbers until sometime in mid-to-late 2024.
Brighter Horizon
Barring any extreme “black swan” event, the housing market should not crash. There are still more buyers than sellers, especially first-time buyers, and that means that a meaningful price decline should not happen. Many would-be buyers have been waiting for rates to drop—but if mortgage rates do decline meaningfully, it could send new buyers flooding into the market, pushing up home prices.
While prices could fall, the decline will not be as severe as the one experienced during the Great Recession of 2008. One obvious difference between now and then is that homeowners’ personal balance sheets are much stronger today than they were 16 years ago. In fact, a December 2023 analysis by Realtor.com report found that two-thirds of all current mortgages had rates below the 4% mark. Today’s homeowners stand on much more secure footing than those coming out of the 2008 financial crisis, with many borrowers having substantial home equity.
Change in Commissions
A new headwind has been generated as a result of the settlement in March 2024 of a lawsuit against the NAR. Until now, home sellers paid about 6% of the sale price toward a fee that would be split between their own agent and the buyer’s agent. As a part of the settlement, the NAR agreed to change its rules so that brokers who list a home for sale on any of the databases affiliated with the NAR are no longer allowed to include offers of compensation for a buyer’s agent. This officially takes effect July 2024.
The policy changes could help spur price competition for agents’ services and lower the cost for sellers, who now typically cover the commission for the buyer’s agent, as well as that of their own. In turn, more homebuyers could face pressure to pay for their agent’s commission out of pocket. That could be a challenge, especially for buyers already stretching financially to make a down payment and cover other upfront costs involved in buying a home.
The biggest change for homeowners looking to sell is they could push back against paying buyer-agent commissions, which could translate into considerable savings.
What happens if a seller doesn’t want to offer to pay the buyer’s agent commission? Homebuyers would be on the hook to shop around for an agent they can afford. They would also have to sign a contract with an agent before they enlist their services, spelling out how much the agent’s compensation will be.
Having to factor in another expense into their homebuying budget could be challenging for homebuyers without a lot of savings or financial flexibility, making it tougher for them to navigate the housing market.
Conclusion: Be Ready Before Buying
The height of the sales market typically comes in the spring, and economists say results during April, May, and June of 2024 will hinge in part on whether buyers can get more relief from mortgage rates. Federal Reserve officials have said they still expect to cut the federal-funds rate at least three times this year.
Also, the new commission rules might squeeze first-time buyers, who might have to come up with more money to pay an agent if sellers choose not to cover the cost. First-time buyers accounted for 26% of home purchases in the NAR’s latest survey, matching the lowest figures ever measured for that group of purchasers.
Factors including millennials entering their prime home-buying years, with accompanying wage growth and increased financial wealth, may serve as tailwinds that will sustain housing demand in 2024.
Buying a house—in any market—is a highly personal decision. Because homes represent the largest single purchase most people will make in their lifetime, it’s crucial to be in a solid financial position before diving in.
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