In 2023, total home sales fell to 3.9 million nationally, the lowest level since 1993. However, home prices stayed steady and even rose in many places as low inventory meant that 1/3 of homes sold in 2023 received multiple offers! These were primarily starter homes or anything below the mid-price points. In 2023, we had a bear market in the volume of sales, but a bull market in terms of prices. So where are we going from here?

 

Interest Rates are Going to Drop

Last fall, interest rates crested at 8%. A level that shocked home buyers who only a year earlier had been seeing interest rates in the 3’s! However, rates are already on the way down, and not just from actions of the Federal Reserve.  The bond market is already pulling rates down from 8% even without Fed action.

 

Expect the Fed to begin cutting rates around June or July, with several rate cuts before the end of 2024. If that happens as expected, then look for rates to drop to 5.75% in the fourth quarter of 2024. New home builders have already proven through their incentives that buying down rates to 6% and below is what stimulates sales on new builds. By 2025, expect rates to be closer to 5%.  What will these lower rates mean?

 

Huge Buyer Demand

The fall of interest rates from 8% to 6.5% is already stirring more buyer interest. Several months back when rates rose to 6.5%, the buyer’s reference point was 3%. Now that rates have gone as high as 8%, 6.5% is looking pretty good! We are already seeing an influx of buyers into the market and expect this to continue in a big way through the first six months of 2024.

 

Additionally, there are two other elements creating buyer demand. The first is Household Formation.  The average age at which people in the US move out of the family home is 26. The average age of a first-time home buyer used to be around 32, but is now closer to 35.  Why? Higher prices mean higher down payments, and higher rates mean higher payments, so in general housing has become more unaffordable.  In this prime first-time buyer slot of people between the ages of 26 and 35, the United States has 45 million people, the largest number in American history. For these people moving out of the family home, rents are now much higher, and in fact rents have been the single biggest contributor to inflation in the United States. Higher rents create a stronger desire to own your own home.

 

The last element creating demand is Employment. The unemployment rate is currently around 3.7%, while the historical average since 2000 is 5.9%. So we have lower perceived interest rates, a huge millennial generation in the prime first-time buyer years, both at the same time when most people have jobs.

 

What will this all do for sales? In 2023, nationwide there were 3.9 million homes sold. Expect about a 20% uptick in total sales from 2023 to 2024, and another 15% uptick in 2025 from 2024’s numbers. However, this will probably play out unevenly in 2024 as inventory levels for the first six months are expected to be low as sellers still are not jumping into the market.