Housing Market Gets More Bad News With Latest Predictions

Elevated mortgage rates are set to keep sellers of previously owned homes out of the market heading into next year, but sales will "bottom out" in early 2024, Fannie Mae said this week, before a rebound the following year.

Mortgage rates hovered near 8 percent as recently as October, the highest level it has hit since the turn of the millennium, which has scared used homeowners from selling their homes as many prefer to stay in lower rates secured in years past. This "lock in effect," as Fannie Mae analysts describe it, has added to a depleted supply of homes available for buyers and helped push up prices.

October saw prices for previously owned homes prices jump 3.4 percent to a median amount of around $392,000, the fourth consecutive annual increase in prices, the National Association of Realtors said earlier this week, as sales plunged by more than 4 percent.

Fannie Mae expected existing home sales to be at 3.9 million in the fourth quarter of 2023, the lowest they have seen in more than a decade.

"Housing has been and continues to be under serious affordability pressure, resulting in recessionary-level home sales activity," Doug Duncan, Fannie Mae's chief economist, said in a statement. "While many current owners with low mortgage rates will likely continue to be discouraged from listing their homes, we expect mortgage rates to trend modestly downward in 2024, which should help kickstart a gradual recovery in home sales into 2025."

While the existing homes market has struggled, new house sales have shown resilience despite an environment of elevated rates.

In September, new home sales soared more than 12 percent from the previous month and jumped 34 percent compared to the same time last year, according to the Census Bureau and the Department of Housing and Urban Development. Builders are offering incentives for buyers to close deals and prices dropped 14 percent in October compared to a year ago, Joe Seydl, a senior markets economist at J.P. Morgan, told Newsweek on Wednesday.

The rise in mortgage rates was fueled by the Federal Reserve hiking rates at its most rapid clip since the 1980s to battle historic levels of inflation that hit 40-year highs. Rates at the current 5.25 to 5.5 percent are at their highest in more than twenty years, though policymakers paused hiking in their last two gatherings.

Inflation has slowed to 3.2 percent in October but it's still below the Fed's target of 2 percent. The cooling of price rises and other economic data over recent weeks has given analysts the belief that policymakers may be done with rate raising, a policy posture that could give relief to the housing market

There has been some evidence that mortgage rates are softening this week. Freddie Mac said on Wednesday that the 30-year fixed-rate mortgage averaged 7.29 percent over the week—a drop of half a percent from the 7.8 percent level it was on October 26.

The trend echoed what mortgage lenders are seeing, as well.

"Most mortgage rates in our survey decreased, with the 30-year fixed mortgage rate decreasing to 7.41 percent, the lowest rate in two months," Joel Kan, MBA's deputy chief economist, said in a statement on Wednesday. "Mortgage applications increased to their highest level in six weeks, but remain at very low levels."

Fannie Mae analysts forecast the 30-year rate to average at 7.7 percent for the fourth quarter of this year decline to 7.3 percent in 2024 and drop further to 6.9 percent the following year.

"We expect existing home sales to begin to rebound later in 2024 as mortgage rates pull back," Fannie Mae experts said. While the lock-in effect and the low number of homes available for sale will likely persist for some time, these limiting factors will begin to diminish."

They added: "The recovery to a pre-pandemic level of sales will likely take years, but we forecast the bottom will be passed in 2024."