It’s hard to deny that 2023’s real estate market has been frigid. After all, this year’s total home sales are shaping up to be at the lowest levels since 2011 and the peak of housing crash-induced buyer anxiety. That said, the experts are feeling cautiously optimistic about the real estate market for 2024.
Here’s what real estate investors need to know:
After months of dwindling home sales, the National Association of Realtors finally reported a 2023 uptick in November. Now, it was a measly 0.8% uptick. But after so long seeing declining home sales, it may be a sign that the tides are turning, and buyers are willing to re-enter the market. That should come as little surprise, as interest rates begin to decline (more on that next).
2024 will likely bring us increased buyer activity – just don’t expect an explosion of steep competition. For a variety of reasons, buyers will still stay reserved. In many markets, housing is overvalued (for example, Manhattan just hit a median home price of $1.1 million). Unaffordability remains the greatest obstacle to buyer activity.
We’re already seeing the slow tick down of interest rates. There are two main aspects to consider here. First, don’t expect rates to drop at a steady or predictable pace. The Fed doesn’t feel the same urgency to lower rates as they did to hike them up, and what they do will largely depend on inflation. Expect rates to trend downward but see ups-and-downs along the way over the next several years.
Second, even the smallest adjustments will make a significant difference. Because home prices are high, even fractions of a percentage change in interest rates translates into hundreds of dollars of difference for one’s mortgage payment. So, while the drop may be slow, recognize that even minor changes can dramatically impact buyers financially.
If you’re thinking about refinancing, you may want to hold out – but do the math for yourself to determine whether it’s worth the hassle.
The suburbs were where we saw the most buyer activity in the wake of the pandemic. Traditionally, suburbs offer more square footage for smaller prices while also benefiting from amenities and proximity to city centers and employment opportunities. While the price gap between the suburbs and city living has closed significantly over the past few years, we’re continuing to see more interest in these types of properties than others.
The suburban appeal wasn’t relegated to the pandemic-era need to put distance between us and our neighbors. Expect both buyers and renter households to value suburban neighborhoods.
Inventory is a problem. That comes as no surprise as we’ve repeatedly emphasized that the inventory shortage isn’t just a result of the 2020 buyer frenzy, but rather the culmination of inadequate building volume after the Great Recession. We simply don’t have enough homes for the number of households that need them. At the same time, it’s not as simple as “build more homes.”
Homebuilders, facing inflation and labor costs, are more incentivized to build higher-end homes, rather than starter homes. Starters, however, are where we have the greatest demand and the biggest shortage. Those who want to enter the market and buy their first home don’t have the benefit of leveraging their existing home equity.
No inventory and high demand means prices go up, and these properties are no longer affordable.
But it’s not just about buyers. Sellers are slow to act because the current market will make it difficult to make moving worth their while, even if they can sell their current home for a profit. Sellers are reluctant because, in many cases, they’re going to trade their current home for a higher interest rate. The lack, then, of existing home inventory on the market also works to keep property prices inflated.
Eventually, something’s got to give!
2024 is shaping up to be a better year for those in the real estate industry. We expect to see some wins and trends in the right direction. People will begin to accept the state of the market rather than pining after the past. Ultimately, investors need to pay attention to their investment markets and be ready to act when their conditions are met for buying.
Stay vigilant!
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