Big gaming

National Housing & Economic Forecast 2024 Midyear Update: Long-awaited mortgage rate relief finally arrives

• Mortgage rates have been revised slightly lower as signals from the economy suggest that it will be appropriate for the Fed to begin to cut its Federal Funds rate in 2024. Our yearly mortgage rate average forecast is down to 6.7%, and we revised our year-end forecast to 6.3% from 6.5%.
• Home price growth has been much stronger than forecast as the U.S. economy remains resilient in the face of a higher rate environment. As a result, we鈥檝e revised our forecast from a decline of 1.7% to a gain of 4.6% for 2024 as a whole.
• Home sales are expected to register only slightly higher than initially forecast, with an increase of 0.8% for 2024. This would mean a total of 4.1 million home sales for the year, the second-smallest annual total since 2012.听
• As demand putters along and sellers remain patient, inventory has started to accumulate on the market more than forecasted. As a result, we鈥檝e made substantial changes to our inventory forecast from a decline of 14% for the year as a whole to a gain of 14.5%.听
• We don鈥檛 expect the wild card election year to be that wild on the economy or housing market in 2024, but the looming political battle over tax policy changes in 2025 will create volatility further down the road.

Realtor.com Forecast for Key Housing Indicators

Economic landscape

The Fed vs. Inflation: Long-running standoff finally ends

In our initial 2024 economic outlook and housing forecast, we noted that inflation would continue to subside. While inflation has indeed subsided, albeit very slowly, it hasn鈥檛 receded fast enough to allow the Fed to reduce its target rate thus far in 2024.

The Personal Consumption Expenditures (PCE) price index鈥攖he Fed鈥檚 target measure鈥攚as up 2.5% from a year ago in June, down from 2.6% and 2.7% in the prior two months, respectively. The widely followed Consumer Price Index was up 3.3% in May and just 3.0% in June, the third consecutive month of deceleration. While both measures remain higher than the Fed鈥檚 2% inflation target, the Fed acknowledged in July that it is minding both inflation and its full employment goal. Although the Fed has not yet lowered rates this year, we expect it to do so beginning in September.

Lower rates finally arrive聽

The July 2024 Fed meeting decision brought no change to the current policy rate of 5.25% to 5.5%. The June 2024 Fed economic outlook showed that the median Fed participant anticipated just one rate cut by the end of 2024, down from three in March. Recent data trends, however, suggest this outlook will be revised in September.

June鈥檚 jobs report already showed slower job growth and rising unemployment, and July鈥檚 jobs report furthered those trends, providing evidence that Fed policy is working鈥攑erhaps working overtime鈥攁nd a rate cut, even a large one, may be appropriate. Despite the uptick in unemployment, continued job growth and gains in the labor force should keep U.S. consumer spending and economic growth in a range that would suggest the Fed can grease the landing.

This is in stark contrast to the sentiment last year that the economy would not be able to thrive with target rates above 5%. Financial markets and investors have mostly adjusted to the higher rate environment, and the notoriously volatile 10-year Treasury yield has been moving steadily downward over the past three months. Thus, we anticipate two drivers of lower mortgage rates by the end of the year and into early 2025.

First, mortgage rates are likely to be driven lower by downward adjustments in the Fed鈥檚 target rate, and second, the spread between the 10-year Treasury and 30-year mortgage rates鈥攚hich sits at 2.6 percentage points鈥攈as room to fall. The 50-year average spread is 1.78 percentage points, which is 82 basis points lower than the current spread.听

2024 housing trends

Annual home sales rebound-ish

In 2023, home sales ended the year at a 4.09 million sales pace, slightly ahead of our late-year projections for 2023 and also our original 2024 sales expectations of 4.07 million. Because affordability headwinds have persisted and mortgage rates have hindered buying power, our home sales projection of 4.1 million鈥攁n annual increase of 0.8%鈥攊s little changed from our initial expectation.

Although there is more inventory on the market than expected鈥攁s explained below鈥攚hich means there is more choice out there for homebuyers, mortgage rate relief had a spring setback. The spring uptick in mortgage rates, which coincided with the heart of homebuying season, had a particularly dampening effect, with June existing-home sales dropping to 3.89 million, the lowest level in 6 months. The arrival of lower mortgage rates will help draw homebuyers back into the housing market, but with a short runway left in 2024 and a sluggish first half to overcome, home sales are unlikely to take off.

Mortgage lock-in effect is easing

One of the factors that has hampered home sales鈥攁n under-supply of homes for sale鈥攈as finally started to ease. We have seen substantial improvement in inventory in the first half of 2024, climbing by more than 35% on a year-over-year basis. This is in stark contrast to our initial 2024 forecast that inventory would be down by 14%. Our revised estimate鈥攖he largest adjustment in our forecast suite鈥攊s now that inventory will be up 14.5%.

Our large revision reflects two somewhat unanticipated market developments this spring. First, some sellers who postponed their decision to sell last year鈥攈oping that mortgage rates would be lower this spring鈥攚ere spurred to action by the better-than-expected mortgage rates at the start of 2024. Second, sellers who have put their home on the market seem willing to wait for a buyer rather than delisting, leading to a longer time on the market and inventory accumulating at a higher rate than expected.听

Home prices continue to climb

Despite elevated mortgage rates, rising inventory, and homes sitting on the market longer, prices continue to rise. As a result, we鈥檝e revised our initial forecast of a small price decline of 1.7% in 2024 to a rise of 4.6%.

This major revision reflects a resilient U.S. economy and a housing market that is still more broadly undersupplied despite recent upticks in inventory. The U.S. economy has added, on average, over 222,000 jobs per month on a seasonally adjusted basis over the first six months of 2024, while real weekly wages have increased by just under 1% over the past year鈥攊n contrast with recent years when higher inflation erased any nominal wage gains.

What鈥檚 more, the nation鈥檚 largest housing markets remain a competitive marketplace and sellers still have the edge, though it has dulled over the past few years with higher rates. Of the 50 largest markets we track, only 12 are back to or above their pre-pandemic inventory levels.听

Rents remain largely steady

Rents have remained largely steady in 2024 as the tug-of-war between rising multifamily completions boosting rental supply and elevated rental demand has resulted in a nationwide stalemate. We see demand from new households and continuing renters who might like to buy a home but find that today鈥檚 rent versus buy scales are tipped too far in favor of renting, but rental supply has kept up as builders work through the backlog of multifamily units under construction.

The nationwide figures mask more variation at the local level, where some markets such as Austin, TX, and Las Vegas, NV, are seeing rents more than 10% below recent peaks while others are seeing new rental highs. Nevertheless, San Francisco was the only metro among the 50 largest markets we track where rents were back to the 2019 level.听

The election is a wild card, but housing policy may not be so wild

Election years can bring volatility to markets, including the housing market, and this year鈥檚 presidential election has already had more surprises than expected. However, we don鈥檛 anticipate this year鈥檚 election to bring many major surprises to the economy or policy that would surpass the impact of the macroeconomic trends outlined above.

Both the Republican candidate and Democratic candidate have served in the White House recently. As such, we think their economic policies will be quite predictable and markets will be able to handle whoever is elected. We acknowledge, however, that the closer the race, the tougher it is to predict the outcome, which can spark volatility.听

With respect to the housing market, the two parties’ housing policies are more similar than they are different. Importantly, both recognize the need for a shift from demand-focused policies鈥攕uch as buyer tax credits and subsidies鈥攖o supply-focused policies aimed at driving the construction of new housing units.

The Democratic nominee, Kamala Harris, is likely to continue the Biden administration鈥檚 policy focus on the supply of affordable housing, which is more likely to improve rental affordability. Meanwhile, Donald Trump鈥檚 housing policy is likely to focus more on deregulating market-rate housing development and renewing efforts to privatize the GSEs. In either case, the housing market would benefit from additional supply.听

One area where the two camps diverge more clearly is on tax policy. While this may not be on the minds of most voters, choices this November will affect who is in charge in 2025 when Congress faces a hard deadline in the form of the enacted in the .

The Republican Party platform proposes making the expiring cuts permanent, whereas the Democratic Party platform takes a more nuanced view of the expiring provisions, aiming to reverse cuts for the wealthiest Americans and corporations.

The NAR settlement is a wild card聽

A lot of digital and physical ink has been spilled over the NAR settlement, which resulted from the antitrust lawsuit Burnett v. National Association of Big gaming et al. and several others.

This settlement is slated to take effect on Aug. 17, 2024, and will have ramifications for the real estate industry as homebuyers, home sellers, and industry professionals figure out how to adjust to new ways of doing business. There has been speculation about how this will affect commissions and house prices.

Our take is that it will depend on macro conditions as much as industry and consumer adaptations and that any adjustments are likely to happen gradually over time.听

One important thing worth noting is that today, in the vast majority of transactions, the buyer鈥檚 real estate agent is compensated by the seller. This compensation and any other seller concessions that may exist are not generally accounted for in real estate statistics. Most reporting is done on the final sale price, regardless of the terms of the sale. Economic theory suggests, however, that this norm is likely capitalized into home prices.

Put another way, today鈥檚 sellers may be 鈥渨riting the check鈥� for agents out of the sale proceeds, but home prices are likely higher as a result since the buyer can generally count on the seller to compensate their agent and do not have to factor that into their buying costs.

If this norm changes, we would expect the price of homes to adjust to reflect the fact that the former benefit鈥攂uyer agent compensation鈥攊s no longer included. Simply put, market adaptations to the settlement agreement could lead to shifts in reported home prices and do present a wild card for house prices not just through the end of 2024 but into 2025 as well.