WASHINGTON—The housing market should begin a gradual return to a more normal balance in 2024, following years of significant oscillations in mortgage rates and divergences of key housing market measures from their historical, pre-pandemic relationships, according to the January 2024 commentary from the Fannie Mae Economic and Strategic Research (ESR) Group.
The ESR Group is projecting mortgage rates will decline in 2024, ending the year below 6%.
“The lower rate environment is expected to boost refinance volumes, which are already on the upswing, as evidenced by the recent uptick in Fannie Mae’s Refinance Application-Level Index, to nearly double their 2023 levels in 2024,” Fannie Mae said in releasing the analysis. “Lower rates are also likely to help ‘thaw’ the existing home sales market currently affected by the so-called ‘lock-in effect.’ In fact, the ESR Group expects the annualized pace of existing home sales to move up to 4.5 million units by the fourth quarter of 2024, compared to 3.8 million in Q4 2023.”
Will Take Years
However, Fannie Mae said a full recovery to the pre-pandemic sales rate is expected to take years, as “housing affordability remains stretched extremely thin by historical standards relative to household incomes. The ongoing lack of supply and affordability constraints in the existing homes market are expected to continue to bolster the market for new single-family homes, with 2024 starts and new home sales forecast to top 2023 levels.”
Overall, the ESR Group expects that a slowly normalizing existing homes market, as well as additional housing supply from the construction of new homes, will help keep further home price growth in check in 2024.
It is projecting home prices will rise 3.2% over the year, compared to 7.1% in 2023.
Economic Forecast
Meanwhile, the ESR Group’s latest forecast continues to project a slowdown in economic growth in 2024, but it also anticipates a “brighter economic backdrop compared to previous months, having replaced its call for a modest recession with positive-but-below-trend growth in 2024.”
The ESR Group said in its view the rapid recent easing in financial conditions following the Federal Reserve’s December meeting and the solid, upward trend in real personal income growth in October and November as “positive impulses” for growth over the coming quarters.
However, the ESR Group said it also wanted to underscore that the current forecast includes heightened uncertainty and significant downside risks, and maintains that the economy still faces higher-than-normal risk of recession.
What to Expect
“In 2024, we expect home sales and mortgage origination activity to begin a gradual recovery in the presence of a slow-growing economy,” said Doug Duncan, Fannie Mae senior vice president and chief economist. “Inflation’s decline and the resultant Fed pivot to signaling future rate cuts rates lead us to believe that home sales and mortgage originations likely bottomed out in the second half of 2023 and that a gradual improvement is now underway. We expect mortgage rates to dip below 6%t by year-end 2024 and for homebuilders to continue to add new supply, both of which should aid affordability.
“Additionally, the decline in mortgage rates is likely to push refinancing volumes upward, along with some pickup in purchase financing,” continued Duncan. “However, even at less than 6%, we think rates will still have a significant way to go in order to meaningfully reduce the ‘lock-in effect’ experienced by homeowners who refinanced or bought during the pandemic. Overall, we expect 2024 to be a better year than 2023 for homebuyer affordability and the mortgage industry.”
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