The housing market may turn a corner next year, but don’t expect it to improve significantly, a new report says.
With mortgage rates dropping over the last few weeks, aspiring homeowners are seeing some relief as their borrowing costs fall. Rates have fallen from a peak of 8% in October to a four-month low of 7.03% as of December 7, according to data from Freddie Mac.
The good news is that rates will continue to fall in 2024, according to Thomas Ryan, U.S. property economist at Capital Economics. “We penciled in mortgage rates at 6% by the end of 2025,” he said on a recent podcast.
Mortgage rates may fall below 7% as soon as April 2024, Realtor.com said in its housing forecast.
Yet a drop in rates isn’t going to be enough to boost home sales, Ryan noted. “You’ve got to keep in mind that’s still considerably higher than the 4% mortgage rates that you’ve had” over the course of the 2010s, he said.
Consequently, he doesn’t expect home sales to get back to where they were before and during the pandemic. “We expect a slow, steady recovery,” Ryan said. In a separate note, he said he doesn’t expect a sustained drop in home prices, due to the shortage in inventory, and he expects sales to remain slow due to “poor affordability, tight credit conditions and a slowing economy.”
‘Least affordable’ year on record for housing
The housing market in 2023 made for the “least affordable” year on record since 2012, Redfin
RDFN,
said when it began tracking the data.
Home-buying sentiment is at a record low, with only 14% of consumers in the U.S. believing it’s a good time to buy a home, according to a recent monthly survey by Fannie Mae.
“The combination of persistent affordability challenges and less rosy household finances remain the primary drivers of the low-level plateauing of housing sentiment,” Doug Duncan, chief economist and senior vice president at Fannie Mae, said in a statement.
“Even if mortgage rates decline over the next year, which we currently expect, it’s unlikely to meaningfully affect affordability,” he added. “The lack of housing inventory is likely to remain a challenge for some time, and home purchase sentiment may continue to be suppressed as a result.”
A U.S. home buyer earning the median household income, currently $78,642, would need to spend about 41% of their earnings on housing costs in order to buy a home at the median price of $408,806, the company said.
“A rule of thumb in personal finance is that people should spend no more than 30% of their income on housing, but that has become less realistic due to elevated mortgage rates and home prices,” Redfin said.
In order to only spend 30% of their income on housing, a home buyer would need to earn an annual income of at least $109,868, Redfin noted, which is also a record high.
