5 Housing Trends to Watch in 2024

Now that 2024 has arrived, many are hoping for a better housing market. Last year saw record-low home sales, one of the worst housing shortages in recent history, and the highest mortgage rates in over twenty years. 

Will this year be any different? And what will it mean for institutional real estate investors? 

Since 2010, the U.S. has had a major housing shortage, which means there have been more buyers than homes for sale. According to a recent estimate, the U.S. must supply around 3.2 million more homes to meet demand. 

Part of the problem is a construction lag. After the 2008 housing crash, many builders built homes at a slower pace to avoid getting stuck with inventory they couldn’t sell (which happened to many leading up to the crash). Plus, recent supply and labor shortages and higher interest rates have made building more expensive. 

The resale market isn’t much better. Last October, existing U.S. homes for sale fell to a 13-year low of 3.79 million. A lot of this had to do with mortgage rates topping 8% for the first time since 2000, pricing many out of the market. But it’s also the result of many homeowners refusing to sell and give up their fixed low-rate mortgages, further constraining housing supply, aka the “lock-in effect.”

Of course, this could change as major life events force more homeowners to sell (e.g. a growing family or a new job requiring owners to move) and if mortgage rates fall …

For about 15 years, homebuyers enjoyed average 30-year fixed mortgage rates of below 5%. But that all changed in 2022 when mortgage rates skyrocketed. 

Why? The Federal Reserve started hiking its key interest rate (which serves as the benchmark for all other interest rates, including mortgage rates) in March 2022 to ease rampant inflation (a result of near-zero interest rates during the COVID-19 pandemic). 

However, now that inflation has fallen near the Fed’s target 2% rate, the central bank hasn’t raised interest rates since July, potentially achieving a “soft landing,” i.e. reducing inflation without causing a recession. 

Since their recent October peak, mortgage rates have been coming down. As of 4 January 2024, the average 30-year fixed rate is 6.62%. 

Though it’s impossible to predict where mortgage rates go from here, there’s good reason to believe they could fall. For one, the bond yield curve, which shows the yields of different treasury bonds at various maturity dates (1 month to 30 years) is inverted. This means yields are higher for short-term bonds than for long-term bonds, indicating investors expect interest rates to fall.  

Furthermore, recent surveys show that consumers expect mortgage rates to fall, too.

The consensus among experts is that mortgage rates will decline gradually across 2024, landing somewhere between 6.1% and 6.6% by the end of the year. Most aren’t expecting mortgage rates to go up. If anything, they’ll stabilize, which will at least inject further confidence in homebuyers about where interest rates will be over the next year.

Of course, anything could happen. 

Assuming mortgage rates fall, housing sales could pick up. For one, it would make homes more affordable, bringing more buyers to the market. But it would also help free up existing homes held captive by the lock-in effect, i.e. more homeowners would be willing to sell if they can buy their next house at a lower mortgage rate.

All of this could heat up the housing market.

It’s no secret that many millennials are trying to buy homes. They’re America’s largest generation and entering their prime homebuying years (25 to 45 years old). 

However, compared to previous generations, many millennials are becoming homeowners at later ages or not at all—partly due to the challenging housing market of the last few years. 

Still, the American dream of owning a house is alive and well. According to a recent survey, nearly three-quarters of Americans place owning a home above career, family, and college as a sign of prosperity. 

This means that despite the challenging market and competition from baby boomers competing for the same homes with more cash, many millennials are pushing forward in their goal to buy a home. Those who haven’t yet succeeded only add to the pent-up demand for houses, especially smaller, starter homes.

Low supply and pent-up demand will likely keep home prices high for the foreseeable future. As of Q4 2023, the median home sales price was $431,000. 

This puts a strain on first-time homebuyers, especially considering the added cost of higher mortgage rates. In fact, home affordability is the worst it’s been since 1984.

The household income required for the median $431,000 home at the current average 30-year fixed rate of 6.62% is nearly $100,000 (assuming the borrower spends only a third of their monthly income on their monthly mortgage payment). 

However, wages haven’t kept up with home prices. According to the Federal Finance Housing Agency, home prices rose 74% from 2010 to 2022, while the average wage rose only 54% during the same period.

To make matters worse, home insurance costs in many coastal markets (e.g. in California and Florida) have gone up. 

Bottom line: High home prices and home affordability will still be major challenges in 2024. 

That said, every housing market contains investment opportunities. And things are looking up for many investors and consumers.

According to a recent New Western study, 53% of residential real estate investors expect business growth in 2024, and 55% of consumers feel that local investors can help solve the housing shortage.

Here are a few examples of potential silver linings in this year’s housing market:

As a real estate investor in 2024, now may be the time to double down on creative investing strategies that take advantage of the rise of ADUs, remote work, and crowdfunding opportunities.