HOUSING MARKET ANALYSIS: BEYOND THE BOTTOMING OUT OF HOME SALES

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The housing market has been a topic of much discussion recently, and it's leaving many people wondering what's in store for the coming years.

Let's break down their predictions in simple terms.
 

2023

Both Fannie Mae and MBA economists agree that 2023 is likely to see a decline in home sales. Fannie Mae expects a 14 percent drop in home sales to around 4.9 million units. This decline is driven by an anticipated 16 percent decrease in the sales of existing homes, which could outweigh a 7 percent increase in new home sales.
 

Source: Fannie Mae housing forecast, August 2023

Why is this happening?
There are a few factors at play. Obviously one significant factor is rising interest rates. When rates go up, it can make buying a home less affordable, which can lead to fewer sales.
 

2024

Economists at Fannie Mae have a somewhat pessimistic view. They predict that even if a recession is avoided, home sales are likely to stay slow and within a narrow range. One reason is the limited supply of homes for sale. There just aren't enough houses available to meet the demand, and this shortage has been driving up prices. Additionally, many existing homeowners are holding onto their current low mortgage rates, making them hesitant to sell and upgrade to a more expensive mortgage.

The MBA has a more positive outlook for 2024. They expect existing home sales to rebound by 7 percent to around 4.6 million homes. What's fueling this optimism?
The MBA economists believe that mortgage rates will drop significantly in 2024. They foresee rates falling from an average of 6.8 percent in the third quarter of 2023 to 5 percent in the fourth quarter of 2024.

 

Source: Fannie Mae and Mortgage Bankers Association forecasts

Lower mortgage rates can make buying a home more attractive and affordable, which could boost sales.
Interest rates are a crucial factor in the housing market's performance. When rates are low, borrowing money to buy a home is cheaper, which stimulates homebuying. However, when rates rise, it can deter potential buyers because higher rates mean higher monthly mortgage payments.

The MBA and Fannie Mae have differing views on the trajectory of interest rates. The MBA believes that the Federal Reserve is done raising short-term interest rates and that mortgage rates will gradually decline as the economy slows down. This is good news for potential homebuyers.

Fannie Mae, on the other hand, is more cautious. They think that the economy's surprising strength, despite Federal Reserve rate hikes, could keep mortgage rates from dropping significantly. This scenario would make it challenging for homebuyers to find more affordable financing.

The state of the housing market also affects home construction. When home sales are strong, builders are more inclined to construct new homes. Conversely, when sales are sluggish, construction slows down, and that is exactly what happened over the last couple of years.

Fannie Mae predicts that single-family home starts will fall by 9 percent in 2023 and remain flat in 2024. Multifamily housing starts, which grew by 15 percent last year, are expected to decline by 9 percent in 2023 and a further 20 percent in 2024.
 
Source: Fannie Mae housing forecast, August 2023

A significant tipping point appears to be a mortgage rate of around 7 percent, where many buyers start to hesitate. If mortgage rates remain high, it could impact the construction of single-family homes.

Despite the challenges in the housing market, there's a silver lining for homeowners. High mortgage rates and limited housing inventory are supporting home prices. Fannie Mae expects purchase mortgage originations to drop this year due to higher rates, but they predict a rebound in 2024. This means that even though there might be fewer home sales, the value of your home could continue to appreciate.

If you're planning to buy a home, keep an eye on mortgage rates. They could make a significant difference in your homebuying journey. And you should be definitely looking at adjustable mortgage loans - you'll have a lower payment, with time to refinance when rates drop.

In the world of housing, one thing is certain: it's a dynamic market that can change rapidly. So, whether you're buying or selling, it's essential to stay informed and be prepared for what the future might hold.