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It’s no secret that 2023 was an interesting year for the residential real estate market. Inflation, near 8% mortgage interest rates, the third straight year of declining inventory in both the resale and new construction sectors, and an underlying apprehension on the state of the economy were all drivers in what most would describe as a rough year for real estate. Adding to the head-scratching anomalies of the residential market’s performance, was the inverse relationship of the rising mortgage rates and market pricing remaining relatively stable. As an example, Bend saw less than one percent of an adjustment in the median sales price from 2022 to 2023. The ever-present topic of affordability remained a critical factor in the continued decline of home sales in 2023. Bend’s total home sales decreased nearly 23% from 2022; and the same goes for the monthly average number of new listings each month, being down nearly 24% from the previous year. It was without question it was a bumpy year for real estate.
So, if we dust off the proverbial crystal ball, what does 2024 hold for the residential real estate market? There is a general consensus among economists that the residential market will remain very tight and inventory levels will stay at record lows. This is due in part because nearly 9 out of 10 homeowners have mortgages with rates less than 6%. According to Redfin, of the 91% under 6%, a whopping 62% of those mortgage holders enjoy a rate under 4%. With so many mortgage holders sitting on such low rates, even those who would like to sell, simply aren’t doing so in order to avoid financing at current interest rates and increasing monthly mortgage payments. New construction inventory also remains low. Cost of development has steadily increased year over year and builders have felt the squeeze, specifically with rapidly rising SDCs, permitting and the length of time it is taking for cities to grant approval, on top of the labor and supply shortage; they are not able to build at pace that can make a dent in the inventory problem.
Price growth will remain modest in 2024, but don’t expect to see any downward pressure on pricing. Lawrence Yun, chief economist for the National Association of Realtors projects that while home sales will rise just over 13% in 2024; price growth overall isn’t expected to increase more than a percentage point and the national median home price is forecast to remain largely unchanged at 0.90% growth. The consumer adjustment to increased mortgage interest rates and hesitancy to enter the market will contribute to the stagnant price growth. Furthermore; the inventory crunch will continue to buffer any downward pressure and insulate prices from decreasing.
Inflation is another factor in the residential real estate market growth. The Fed’s announcement on 1/31/2024 to hold its benchmark federal funds rate where it has been since summer 2023, and signaling a course to start cutting rates toward the end of 2024 and into 2025, many are forecasting that the bond market will decrease with mortgage rates following suit. The vast majority of forecasts are predicting the rates will fall to 6% range and stabilize in the latter half of 2024. Clint Edwards, President/Mortgage Broker of High Lakes Lending, LLC says, “Mortgage interest rates are down nearly 1.50% from the highs we experienced in October 2023 and are expected to continue to decline throughout 2024. They will not move in a straight line, but we have a declining rate trend in play, and as long as inflation continues to abate, we should have lower mortgage rates available as the year progresses. We are already seeing increased buyer interest and expect to have a more active buyer market as the word gets out that mortgage rates are declining. Hopefully, this will also allow sellers to consider a move as they can replace their current low rates with a new loan more in line with what they have with their current loan, allowing for an increase in inventory, which is needed for a healthy housing market.”
As rates begin to drop and stabilize, sales volume will increase in the latter half of 2024. That will be a direct reflection of the pent-up demand created by new household formation that has been sidelined by rising rates, lack of inventory and affordability. This demographic is expected to come off the sideline and enter the market in 2024, with the help of the transfer of generational wealth.
Affordability will continue to be a steadfast issue for the residential market in 2024. While Oregon’s governor is expected to introduce legislative bills intended address Oregon’s lack of inventory and spur development of affordable housing, the impetus falls on our local government officials, city managers and planners to take a swift and effective action in the development and installation of the infrastructure needed for developers and builders to continue to create housing inventory. The outdated and unrealistic model of passing the infrastructure cost burden to developers, coupled with steadily increasing fees and expecting that affordable housing will be built is clearly not working. Until we see local and state government entities begin to collaborate and contribute to the cost of development and infrastructure, affordability will remain a critical issue through 2024 and years to come.
The outlook for 2024 looks to be far less turbulent than 2023. The residential market looks to be normalizing. By all accounts, 2024 is signaling to be a good year for residential real estate.
