According to a recent report, the housing market may see some improvements in the coming year, although the changes might not be significantly impactful. With mortgage rates experiencing a decline in recent weeks, prospective homeowners can breathe a sigh of relief as borrowing costs decrease. From its peak of 8% in October, rates have now dropped to a four-month low of 7.03% as of December 7th, as reported by Freddie Mac.
The positive news is that this downward trend in rates is predicted to continue into 2024, with Thomas Ryan, U.S. property economist at Capital Economics, projecting mortgage rates to reach 6% by the end of 2025. Similarly, Realtor.com forecasts that rates might even dip below 7% as early as April 2024.
However, despite these favorable developments, the decrease in mortgage rates alone will not be sufficient to bolster home sales. Ryan emphasizes that the current rates are still considerably higher than the 4% rates that were prevalent throughout the 2010s. As a result, he does not anticipate a complete recovery to pre-pandemic home sales levels. Instead, he foresees a slow and steady recovery.
Ryan also notes that a sustained decline in home prices is unlikely due to inventory shortages. Additionally, various factors such as poor affordability, tight credit conditions, and a slowing economy are expected to contribute to sluggish sales.
Year 2023: The Least Affordable Year for Housing
The year 2023 marked a significant milestone in the housing market. It was deemed the "least affordable" year since 2012, according to Redfin's data tracking efforts.
Home-buying Sentiment Hits Record Low
According to a recent monthly survey conducted by Fannie Mae, the sentiment towards buying a home in the U.S. has reached an unprecedented low, with only 14% of consumers considering it a favorable time to make a purchase. Doug Duncan, the Chief Economist and Senior Vice President at Fannie Mae, attributes this decline in sentiment to two key factors: ongoing affordability challenges and a less optimistic outlook on household finances.
Duncan further explains that even if mortgage rates were to decrease in the coming year, as projected, it would not significantly improve the affordability of housing. The primary obstacle that continues to hinder the market is the insufficient supply of homes available for sale. This scarcity in housing options is expected to persist for some time, exacerbating the dampened sentiment towards home purchases.
To put things into perspective, Fannie Mae indicates that a home buyer in the U.S. with an income at the median household level, which currently stands at $78,642, would need to allocate approximately 41% of their earnings towards housing costs in order to afford a home priced at the median value of $408,806.
However, when considering the personal finance guideline that suggests spending no more than 30% of one's income on housing, the situation becomes even more challenging. Due to elevated mortgage rates and soaring home prices, this 30% threshold is becoming increasingly unrealistic for many individuals. Real estate brokerage firm Redfin supports this claim and advises that prospective home buyers would need to earn an annual income of at least $109,868 in order to conform to the 30% standard - a figure that also marks a record high.
In conclusion, the current state of home-buying sentiment in the U.S. is heavily influenced by persisting affordability concerns and constrained housing inventory. Despite potential future declines in mortgage rates, affordability is unlikely to improve significantly. As a result, the sentiment towards purchasing homes is expected to remain suppressed for the foreseeable future.
