U.S. Housing Market January Recap: Home Prices & Limited Inventory Top Affordability Concerns

In the context of high inflation, elevated mortgage rates, and soaring home prices, there exists much concern about how the housing market will evolve in 2024. Debra Shultz, VP of Lending at CrossCountry Mortgage, believes that reducing inflation and mortgage rates will help affordability. “However, there’s an inventory problem in many markets,” Shultz said. “Limited homes for sale and first-time homebuyer demand will lead to competition and bidding wars, which will likely drive prices up.”

Brian Letendre, Director of Agent Productivity at BOND New York, agreed, saying “We’re estimated to have a few mortgage rate drops over the next year, and I think it’s going to give a much-needed boost to the sales market. I think it’s going to free buyers from the hold that they’re in right now but will also likely mean some price increases.”

How many more price increases can the average U.S. homebuyer withstand? Seth Levin, Real Estate Broker at Keller Williams New York City, stated, “High inflation had a profound impact on the U.S. housing market, [and] the result was a shrinking buyer pool and a significant constriction on listing inventory.”

According to the January 25th Zillow Home Value and Home Sales Forecast, Zillow now predicts a 3.7% gain in home values for 2024, revising their previous forecast, calling it “a pace of appreciation closer to long-term norms.” One month ago, Zillow expected home values to remain flat over the next 12 months.

Zillow’s revision in their forecast is due to several external factors, such as the decrease in mortgage rates toward the end of 2023. According to Mortgage News Daily, on February 16th, the average 30-year fixed rate was 7.14%, showing a decline from the 20-year high of 8.03% in mid-October 2023. That being said, mortgage rates have been slowly creeping higher in 2024.

How are mortgage rates affecting buyers and the U.S. housing market? Levin states, “Mortgage interest rates have declined since their high watermark, so buyers should still be enticed back into the market. However, most sellers will still be hesitant to trade their historically low rates for what is currently available. This confluence should result in a further squeeze on limited inventory, further elevating prices, which will not provide the relief needed for sidelined buyers.”

High inflation and mortgage rates are also uniquely affecting housing market dynamics. Letendre explains, “Right now, at least in New York, we’re just starting to move a bit quickly. We have buyers holding because they want to wait out the interest rates, but sellers that don’t have to sell right away are also waiting for spring and at least one of the interest rate drops. So, everyone feels like it’s a buyer’s market, but with inventory so low, it’s not quite.”

Over the past several years, the market has experienced high mortgage rates, but nothing close to the 8.03% witnessed in October 2023. Zillow acknowledges this, stating that mortgage rates have reversed course, although they have risen in recent weeks. For example, mortgage rates recently increased nearly 50 basis points due to the strength of the U.S. jobs market. According to a February 5th U.S. Bank report, 353,000 jobs were added in January, wages grew 4.5% over last year, and unemployment “held steady at 3.7% for the third consecutive month.”

Based on current economic factors, what is the expected U.S. housing market outlook for 2024? Letendre anticipates, “I think we’re going to be slow and steady the first half of this year, and then we’re going to move towards a correction. Home prices tend to lag behind the S&P by about seven months, maybe a little more, so if the S&P has strong gains in 2024, so will home prices.”

Levin adds, “The economy is growing, inflation is near target, consumer spending is humming, and the unemployment rate is at a near half-century low. If the economy keeps this up, interest rates will not come down meaningfully enough to bridge the affordability gap. The market will continue to be dominated by well-healed, seasoned buyers. Younger and first-time buyers are, unfortunately, fighting an uphill battle.”

How can first-time buyers face purchasing a property with any degree of certainty? Shultz suggests exploring options such as “lender-offered down payment assistance grants, seller credits to fund temporary rate buydowns, first-time homebuyer products with no loan level pricing adjustments, and renovation loans for less expensive properties that need some work.” Letendre emphasizes, “The more ways banks can sort how to get creative with financing or maximizing the first drop to the benefit of buyers will help boost the market.”

Zillow’s forecast of existing home sales (excluding new construction) calls for 4.09 million sales in 2024, on par with 2023, which, as previously mentioned, was a 28-year low. This is rather concerning, to say the least. However, Zillow is calling for home values to increase by nearly four percent. Due to historically low inventory levels, a large decrease in sales does not necessarily imply a drop in prices.

Zillow’s Home Value Index and Home Value Forecast graph shows a precipitous home value uptick in 2020, 2021, and the first half of 2022. Because of the pandemic, home values decreased during the last half of 2022. However, home values increased in 2023, ending with a December increase of 3.7%.

CoreLogic’s forecasting methodology, which differs from Zillow’s, focuses on their home price index (HPI). According to a February 6th CoreLogic U.S. Home Price Insights report, home prices will increase by 2.8% on a year-over-year (YOY) basis from December 2023 to December 2024.

CoreLogic’s National Price Forecast graph shows the 2024 YOY home price gain alongside a month-over-month (MOM) price decrease of -0.2%. The HPI increased by 5.5% from December 2022 through December 2023, aligning closely with long-term averages. Normally, the market experiences a home value gain of three to five percent annually. The projected 2.8% YOY increase over the next 12 months is slightly below Zillow’s home value forecast of 3.7%.

CoreLogic highlights that the Northeastern states experienced the largest home price gains in December 2023, with no states or districts posting YOY losses, marking “the first time that the latter trend has been observed since late 2022.”

CoreLogic emphasizes that while home price appreciation is likely to slow down, home prices are also likely to increase during the spring, reaching new records due to limited inventory levels. Also, CoreLogic claims that despite the recent decrease in mortgage rates mitigating some home affordability challenges, mortgage rates might not decline until later in the year. Therefore, inventory levels and mortgage rates will be pivotal factors in tracking the direction of the 2024 U.S. housing market.

Due to low affordability and tight inventory, the overall health of the U.S. real estate market is being affected. “Sales numbers just drop—buyers underbid, and sellers leave units on the market or pull it all together,” Letendre said. “More people end up renting longer, which drives the demand up in that market as well as rents.”

“Cash buyers did well and dominated specific markets, like mine in New York City, and many that would be financing were priced out as affordability became a major concern,” noted Levin. “Prices held relatively firm, the result of lower available inventory. The government and its proxies tried unsuccessfully to tamp down housing prices with the steep and sudden rise of interest rates, but its intended result did not play out. Lowering interest rates gradually is the panacea that the housing market requires.”

So, how are home prices faring? According to CoreLogic, each state posted gains in home prices on a YOY basis in December. Nationally, home prices increased by 5.5%, with the largest increases in Rhode Island (13.3%), New Jersey (11.3%), and Connecticut (10.5%). The CoreLogic U.S. map depicting price changes over the past 12 months indicates that only Idaho, Montana, and Texas had price gains in the range of 0.1% to less than one percent within the last year, whereas the largest price gains are in the Midwest and South. Click on the U.S. map to see the top ten states with the largest YOY home price changes.

CoreLogic also shared a graph illustrating the HPI change for the top 10 U.S. metros. Miami, Florida, led the nation with a home price increase of 10.7%, contrasting with a 19.5% increase one year ago. Houston, Texas, only increased by 1.4% compared to 8.7% 12 months ago. While other markets saw fewer changes, San Diego home prices are now up by 8.1%, compared to 4.5% in 2023. Not one of the top ten metros is down on a YOY basis. Click on the top map to see the top 10 metros’ market condition indicators. More than half of the largest regions have home prices considered to be overvalued.

CoreLogic’s final graph identifies the top five markets at risk of home price decline over the next 12 months. Leading the nation is the Spokane, Washington area, followed by two cities in Georgia and nine regions in Florida. This being stated, CoreLogic states that “The 2024 homebuying season should enjoy a boost because of pent-up demand, as well as a robust job market and wage growth.”

So, what will 2024 bring to the U.S. housing market? Will prices stabilize, and will inventory recover? Will buyers be able to afford their first house, and will those seeking to sell their existing property be able to do so without taking a loss?

Shultz believes that the current housing market is on the road to correcting itself, and there are options for those interested in new builds as well as that all-important first home purchase. “Temporary rate buydowns have always been around, but mainly offered by builders as an incentive to purchase their inventory.  Now, they’re offered by most lenders, including CrossCountry Mortgage, for existing homes to help homebuyers feel comfortable with their payment the first few years. The assumption is that rates will continue to drop, and the opportunity to refinance before the note rate payment kicks in will present itself.”

Levin also believes the U.S. housing market is working to rebalance itself, although admittedly, the correction is taking time while radically affecting the market and its would-be buyers. “We don’t want interest rate reduction measures to bring back rampant inflation. However, the overall health of the real estate market, affordability, and the promise of the American dream for younger generations is tied to home ownership.”

So, what about affordability? As mentioned, both Zillow and CoreLogic expect a rise in home prices over 2024. It remains to be seen how a multitude of other factors, such as mortgage rates and available inventory, will ultimately play a role in defining home prices.

“With over two decades of experience in various real estate markets, I’ve never seen anything that mirrors the current situation,” Levin said. “Prices have never been this high, and if interest rates don’t come down enough to encourage homeowners to trade property, the scarcity of good inventory will not lead to the price reductions that many would-be buyers have been hoping will come in 2024.”