January 2024 Housing Market Report: A Promising Start Amidst Lingering Challenges

As we enter 2024, the U.S. housing market shows signs of a dynamic shift from the previous year's challenges. 2023 was a year marked by high-interest rates, inflationary pressures, and concerns of a looming recession, resulting in a significant downturn in home sales and affordability. However, the onset of 2024 has brought a renewed sense of activity and competition in the market, albeit with continued complexities.

Last Year's Struggles Set the Stage

Looking back on 2023, the housing market witnessed one of its most challenging years. According to the National Association of Realtors, existing home sales plummeted to their lowest level since 1995, with only 4.09 million transactions. This downturn, more severe than the Global Financial Crisis, was attributed to high mortgage rates nearing 8%, making housing the least affordable since 1984.

The 2024 Market: A Powerful Start?

Contrasting the sluggish start of 2023, this year has begun with a surge. Real Estate Expert Steven Thomas likens the current market to a winter farmers market with limited fruit selections - the housing shelves are half-empty, making it challenging for buyers grappling with higher mortgage rates and fewer options. Despite muted demand, the scarcity of inventory has heated up the market right from January.

Steven Thomas Gives the Following advice for Buyers and Sellers

ATTENTION BUYERS: Waiting for the market to slow and negotiations to line up in a buyer's favor is not the answer. For the market to lean in favor of buyers, there needs to be considerably more homes available to purchase compared to weak demand. Unfortunately, there is a chronic scarcity of homes with FOR-SALE signs in the yard. This will not suddenly change anytime soon based on all current trends. With mortgage rates anticipated to drop further this year, there will be increased buyer competition with increased home affordability. Yes, more homes will opt to sell as rates drop, but the more robust demand will offset any increase. Instead, buyers should pursue a purchase with patience and steadfast determination. It may take several offers to find success, but it is that kind of persistence that is ultimately rewarded with the keys to a new home.

ATTENTION SELLERS: Take advantage of the hotter market by pricing a home close to the last comparable or pending sale. Careful pricing will allow a seller to tap into all the buyers waiting for every home that hits the market. A realistic price will allow a seller to attract immediate interest. Sellers who stretch the asking price too much and grossly overprice will result in wasted market time and less activity as the price is adjusted down the road. In this market, it is best to take advantage of the buyer pool that is carefully watching and waiting for every new home that matches their search requirements.

NAR's Observations: A Possible Market Rebound

The National Association of Realtors (NAR) presents a cautiously optimistic outlook for the 2024 housing market, despite the challenging landscape of 2023. Last year marked a significant downturn in the housing market, with existing home sales plunging to their lowest since 1995, recording only 4.09 million transactions. This steep decline, surpassing the downturn experienced during the Global Financial Crisis, underscored the severity of the challenges faced by the market.

However, NAR points to potential signs of recovery. In December 2023, despite a month-to-month decrease of 1% in existing home sales and a 6.2% drop from the previous December, there are indications of a market bottoming out. The total sales for 2023, though the lowest in decades, could represent the nadir, with expectations of an upward trajectory in 2024. This potential rebound is bolstered by a modest increase in inventory levels towards the end of the year, with total housing inventory at 1 million units, amounting to 3.2 months of supply – a slight improvement from the previous year.

Moreover, the median existing home sales price in December 2023 was $382,600, marking a 4.4% increase from the previous year. While this contributes to ongoing affordability challenges, it also suggests a cooling in the previously rapid price growth, potentially indicating a market moving toward equilibrium. Thus, while 2023 was marked by low sales and elevated prices, the emerging trends suggest a gradual shift towards a more balanced market in 2024, offering new opportunities for both buyers and sellers.

Zillow's Insight: Rising Competition Despite Low Inventory

Zillow's analysis of the housing market at the start of 2024 paints a picture of a sector still grappling with the aftermath of a challenging 2023 but showing signs of transition. Despite the previous year being marked by low inventory, high mortgage rates, and soaring home prices, the current market is unexpectedly more competitive than it was before the pandemic. This is primarily due to the ongoing scarcity of available homes, as explained by Zillow's senior economist, Orphe Divounguy. Homes are now going under contract significantly faster, approximately 50% quicker than pre-pandemic norms. This speed is partly attributed to the current 6% mortgage rate, which, while dampening the competition to some extent, has not eliminated it entirely.

The Shift Away from 'Rate Lock'

The year 2024 is expected to witness a shift from the 'rate lock' phenomenon that heavily influenced the market in 2023. Homeowners were hesitant to sell their homes due to the high mortgage rates, contributing to the limited inventory. However, Zillow's recent survey indicates a changing mindset, with 21% of homeowners considering selling their homes within the next three years. This emerging trend suggests that the concern over high mortgage rates is diminishing, potentially leading to more homes entering the market and somewhat easing the competitive pressure.

Signs of Market Improvement and Challenges Ahead

The end of 2023 saw a slight easing in mortgage rates, which brought some movement back into the market. Zillow's data reflects this change, showing an improvement in newly pending home sales and hinting that the market may have reached its lowest point. Despite these positive developments, the housing market is still facing a supply constraint. The lack of existing homes on the market continues to be a significant challenge, providing an opportunity for builders to cater to the demand. Incentives like rate buy-downs are being offered to make home purchases more appealing to potential buyers. As we move further into 2024, these dynamics suggest a housing market that is slowly adapting, marked by both continuing challenges and emerging opportunities.

Redfin's Insights into Homeownership Trends

Redfin's analysis provides a detailed look into the evolving demographics of U.S. homeownership as of 2023, revealing significant trends across generations. Notably, the homeownership rate among adult Gen Zers has remained relatively stable compared to 2022, with 26% owning a home. In contrast, millennials and Gen X have seen a rise in homeownership rates, climbing to 55% and 72%, respectively. This increase is particularly noteworthy for millennials, who have historically faced numerous challenges in the housing market. Moreover, most adult Gen Zers are outpacing their parents in homeownership at the same age, likely benefiting from the opportunity to purchase homes when mortgage rates were near record lows.

The Changing Landscape of Large Home Ownership

Redfin's data also sheds light on the distribution of large home ownership in the U.S., highlighting a shift over the past decade. Currently, empty-nest baby boomers own a substantial 28% of the nation's large homes. In contrast, millennials with children hold just 14% of these larger properties. This disparity is partly due to the more favorable affordability conditions that boomers experienced when they were younger and the lack of financial incentives for them to sell now. Many boomers either own their homes outright or have mortgages with low rates. A decade ago, young families were just as likely as empty nesters to own large homes, but this balance has shifted dramatically, with empty nesters occupying a significant portion of these properties across the U.S., and millennials with children owning the least in coastal California and the most in the Midwest.

The Lock-in Effect and Its Implications

The 'lock-in effect' is another critical factor shaping the current housing market, as highlighted by Redfin. This phenomenon is characterized by homeowners choosing to stay put due to their low mortgage rates, which are often below the current average. In 2023, a significant 88.5% of U.S. homeowners with mortgages had an interest rate below 6%, down from a record high of 92.8% in mid-2022. This high percentage of homeowners with low rates has contributed to many opting not to sell, thereby exacerbating the inventory shortage in the market. However, as the share of homeowners with rates below 6% begins to decline, partly because some are deciding to move despite higher rates, this may slowly start to influence the market dynamics, potentially leading to an increase in inventory as more homeowners decide to sell their properties.

A Year of Cautious Optimism

As we navigate through January 2024, the housing market is showing signs of vitality, driven by a scarcity of homes and a faster pace of transactions. Despite the persistent challenges of high mortgage rates and affordability issues, there are indications of a gradual market rebound. The demographic shifts and changing homeowner behaviors suggest a nuanced and evolving real estate landscape. Buyers and sellers alike must adapt to these dynamics, keeping an eye on emerging trends and opportunities in what promises to be a year of cautious optimism in the housing market.