One Of The Most Challenging Years In Decades

The U.S. housing market is facing its most challenging year in nearly three decades. Sales of existing homes in 2024 are projected to be the lowest since 1995, marking the second consecutive year of sluggish activity.

  • Persistent high home prices, elevated mortgage rates, and economic uncertainties are keeping potential buyers on the sidelines.
  • The latest data from the National Association of Realtors (NAR) shows a 3.5% drop in September sales compared to the previous year, with the seasonally adjusted annual rate falling to 3.84 million, the lowest since October 2010.

Economic and Market Headwinds

Despite expectations for a rebound in 2024 following a slow 2023, the housing market has struggled to gain momentum. Home prices have continued to rise due to low inventory levels, further straining affordability. Many potential buyers are also deterred by climbing mortgage rates, which have remained higher than forecast, even after a Federal Reserve interest rate cut last month.

  • Expectations that the Fed would cut rates this year did lead to a temporary dip in mortgage rates to 6.08% in September, but this reprieve came too late for many buyers, who typically prefer to move during the spring and summer months.
  • Moreover, the decline was short-lived, as mortgage rates quickly climbed back, mirroring increases in the yield on the 10-year Treasury note, which has hovered above 4%.

Rising Prices and Inventory Challenges

Home prices continue to defy expectations, reaching a national median of $404,500 in September, a 3% increase from the previous year and the highest on record for that month. Inventory constraints are a significant factor, with the number of homes available for sale still below historical norms in many regions. Although the number of homes for sale or under contract rose 23% in September compared to a year earlier, supply remains tight, with a 4.3-month inventory at the current sales pace—considered the low end of a balanced market.

  • Many homeowners who secured low mortgage rates during the pandemic are choosing to stay put, further limiting inventory.
  • This phenomenon, often referred to as "rate lock-in," makes it less appealing for homeowners to sell and take on new loans at higher interest rates.

Consequently, the market remains in a state of gridlock, with fewer options for prospective buyers.

Affordability Concerns

Affordability has emerged as a critical issue in the housing market, driven by high home prices and elevated borrowing costs. According to Fannie Mae, a recent survey revealed that 42% of respondents expect mortgage rates to decrease in the next 12 months, while 39% anticipate further price increases. These mixed expectations highlight the uncertainty facing buyers and sellers alike.

  • The impact of high borrowing costs is evident in the mortgage application data, which has seen four consecutive weeks of declines. Lenders have also widened the spread between mortgage rates and the 10-year Treasury yield, further elevating borrowing costs.
  • This spread expansion reflects the increased risk associated with mortgages compared to government bonds, especially in a volatile interest rate environment.

The Effect on Buyers and Sellers

The prolonged downturn has created a challenging environment for both buyers and sellers. Some potential homebuyers are finding themselves in a better negotiating position, with less competition and longer listing times. For example, the typical home in September spent 28 days on the market, up from 21 days a year earlier.

  • As the market heads into the traditionally slower holiday season, real estate agents are cautiously optimistic that sidelined buyers may re-enter the market in early 2025.
  • Some experts argue that demand for housing is not vanishing but is being deferred.

The housing market remains a focal point in the broader economic debate, with affordability emerging as a key issue in the upcoming presidential election. Both parties have proposed measures to address housing costs, from building more affordable homes to offering assistance with down payments.

Disclaimer

Please note that Benchmark does not produce investment advice in any form. Our articles are not research reports and are not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Breno Assis / Unsplash.