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The past few years have exaggerated the cyclical nature of real estate, as once-in-a-lifetime mortgage rates led to a sudden and historic boom in home sales in 2020 and 2021. Then, just as quickly, the winds shifted and locked consumers under the weight of rising mortgage rates, dropping inventory and sticky inflation — leading to a 30-year low in home sales.

Luckily, 2024 has ushered in moderating mortgage rate fluctuations, slowing inflation growth, strong jobs and unemployment reports, and an unusual late-winter uptick in new listings. Even with positive signals popping up like freshly sprouting grass, several economists told Inman wider economic conditions are making homebuyers more anxious than ever.

“I expect this spring to be a mirror of last year,” DC-based consulting economist George Ratiu said. “While people have been hopeful and optimistic that we hit rock bottom in 2023, when you look at the overall conditions, whether economic, monetary, financial or personal, there are some similarities.”

“Consumers are a little more extended financially [than 2023]. Consumer debt, credit card debt, auto loans are all higher than they were a year ago,” he added. “That’s why they’re not feeling in sync with some of the more positive economic data.”

George Ratiu

Ratiu said 2024’s labor market and income and wage growth are on par with 2023, as average hourly earnings grew 1.4 percent year over year from January 2023 ($11.01) to January 2024 ($11.15). While Americans are making more, they’re still spending more as the consumer price index rose 3.1 percent year over year with the cost of shelter, food and electricity remaining resistant to de-inflation.

On top of that, Ratiu said, homebuyers and sellers are still contending with stubborn mortgage rates. Rates fluctuate on a daily basis; however, the average rate for a 30-year conventional loan is 6.9 percent — a 0.2 percentage point increase from March 2023.

“They are under increasing financial pressure, but I think we’ll be out of the woods by next year,” he said. “I don’t think we’re quite out of the woods yet even this spring.”

Blame it on the mortgage rates

Like 2023, mortgage rates will continue to be the main source of homebuyer and homeseller woes. According to a March 2023 Inman Intel report, a rate increase of 1 percentage point can drop home sales by five to 10 percent.

The impact of mortgage rate fluctuations was on full display in 2023 when rates dropped to 6.15 percent in January and sparked a whopping 25 percent week-over-week increase in mortgage rate applications.

That jump fueled hope for a robust spring; however, rates were back to 6.8 percent by March — a shift that led to a 22 percent annual decrease in existing-home sales. The annual decline in existing-home sales fluctuated from 23.2 percent in April to 20.4 percent in May before landing at 18.9 percent in June, the last month of meteorological spring.

A similar trend emerged in the first week of March when mortgage rates dropped to 7.02 percent and sparked an 11 percent week-over-week increase in mortgage rate applications. However, it’s yet to be seen how that will impact March’s existing-home sales.

Chart from Trading Economics | Captions from Inman

Matthew Gardner

Former Windermere Chief Economist Matthew Gardner said mortgage rates will likely deliver the same one-two punch to home sales over the coming months as the idea of the voluntary homeseller continues to falter under the “lock-in effect.”

“I think we’re still going to be in a similar situation that we saw last year,” he said. “We’ve talked about this before, but the number of households who have a remarkably low mortgage rate they don’t want to lose [is high].”

“If a homeseller moves and needs to borrow money to purchase their next home, they’re looking at rates, which are likely close to double the one that they currently hold,” he added.

A January 2024 Redfin report put the numbers to Gardner’s statement. A staggering 88.5 percent of homeowners have rates under six percent. Seventy-eight percent have a rate below five percent, 59.4 percent have rates below 4 percent and 22.6 percent have rates below three percent.

Those figures are below 2022 when 93 percent of homeowners had mortgage rates below six percent. However, it’s still enough to keep homesellers on the sidelines.

“Let’s say you have a mortgage rate of four percent, and you’re comfortable with the payment you’re making,” Gardner said. “Now, hypothetically, if you want to keep that payment the same amid rates of five percent, you’ll have to borrow 10 percent less [than your current mortgage loan].

“That means that we will see transactions this spring for three of four traditional reasons: a job change, death and divorce. We’ll be missing out on the fourth [reason] and that’s discretionary,” he added.

Although the lock-in effect is still in play, Gardner said he expects sales to be a 10 percent improvement from last year, when sales dropped nearly a quarter from 2022.

“It’s still going to be tight, because there still won’t be that many homes for sale,” he said. “So choice will still be limited.”

Daryl Fairweather

Redfin Chief Economist Daryl Fairweather said mortgage rates must drop below six percent for the lock-in effect to finally begin loosening.

“The drop in mortgage rates is going to encourage some buyers to pull the trigger and make a purchase,” she said of the moderation in rate fluctuations compared to 2023. “But for things to really kind of get going again, I think mortgage rates need to drop near six percent.”

“[The drop] could happen really, at any moment, depending on what happens with economic data, but we’re forecasting that rates probably will only fall to 6.5 percent this year,” she added. “So I think 2025 is probably a little more likely for when we’ll get to six percent or under.”

The plight of the first-time buyer

Let’s keep it simple — homebuyers have it rough.

Median prices for existing homes ($379,100) and new residential construction ($420,700) broke records for January. Mix that with a monthly average mortgage rate of 6.62 percent, and buyers are facing an average monthly mortgage payment of $2,188; a figure that’s 96.4 percent more than 2020’s average.

“I do expect it to remain a very challenging market, especially for first-time buyers who have to surmount several obstacles including downpayment, credit scores and income,” Ratiu said. “If mortgage rates continue rising, over the next month, for a lot of buyers, practically that will mean they will want to adjust the budget of the home lower — which is difficult when you see current price trends.”

IBuyer Opendoor gave a window into the sacrifices first-time homebuyers are making to achieve their homeownership goals with a survey of 1,000 respondents who purchased a home between January 2023 and December 2023.

Only 23 percent of first-timers purchased a home solo. The majority purchased with a spouse or partner (61 percent), their parents (16 percent), a friend (11 percent) or a sibling (7 percent).

Nearly 90 percent of first-time buyers told Opendoor they compromised on their purchase, with 32 percent purchasing in an area they didn’t want to live in, 28 percent giving up key features on their must-have list, and 22 percent purchasing a smaller home.

Even with those sacrifices, 43 percent of respondents said they still spent more than they wanted for a home.

Data like this, Gardner said, provides important context to the dropping share of first-time buyer sales.

“The share of first-time [buyers] in January, according to [the National Association of Realtors] was 28 percent,” he said. “That’s not an all-time low. The all-time low is around 27 percent, which we saw a couple of times last year and the year before. But we’re still close to that all-time low.”

All three economists said homebuyers — first-timers in particular — are doing all they can to stay in the market, whether it’s co-owning a home with a romantic partner or friend, purchasing solo with the intent to rent extra rooms, eschewing single-family detached homes for condos and townhomes, being more aggressive in negotiating prices for homes that have languished on the market or relocating to more affordable locales.

“We’re seeing a 22 percent increase in the number of properties with price reductions as of February, another indicator for homeowners who have had their properties listed maybe for several months,” Ratiu said. “The reality is thinking that even though there’s still a supply shortage and prices are still firm, there is much more room for negotiation. For first-time buyers, these are important considerations.”

Meanwhile, Gardner focused on a second, more minor reshuffling than the market experienced in 2020 when remote workers fled from urban locales amid the early days of the pandemic. The early-pandemic boomtowns like Boise and Austin have become unaffordable, which is pushing thirsty buyers to smaller secondary and tertiary markets like New Bern, North Carolina; Oshkosh, Wisconsin; and  Redding, Pennsylvania.

“If you think about some of the historically more affordable markets … they are becoming remarkably unaffordable,” he said. “A good example of that is Riverside, California. It was remarkably cheap, historically speaking, and now it’s one of the least affordable housing markets.”

“People moved out of the Los Angeles basin and into Riverside because of price,” he added. “That’s priced out some of the households that have been there maybe for generations. Now they have to move further out to own. It’s just become remarkably difficult.”

While first-time buyers fiercely row against the headwinds, Fairweather said repeat buyers with deep pockets will likely sail through the spring just fine.

“There are still buyers out there who aren’t so sensitive to interest rates. They’re paying with cash and if not all in cash, they’re putting a lot of money down to reduce their mortgage size,” she said. “There are enough of those people [to keep sales afloat]. Sellers are still able to walk away with these highly valued homes and sell their homes for a high price.”

When will it get better?

Although the past few years have proven the foolishness of reading the tea leaves, Ratiu, Gardner and Fairweather said current economic data points to 2025 as the year the market moves back toward historical norms — if the Federal Reserve successfully tempers inflation without pushing the country into a recession.

“The economy is different now than it was before the pandemic,” Fairweather said. “Remote work is a very different dynamic, and that means that potentially more people can work now than could before the pandemic. If you have a disability or are a caregiver, you have more options for work.”

“I think the economy could potentially grow without putting a lot more pressure on inflation,” she added. “The [January] jobs report looked good in terms of economic growth, and I didn’t really see a lot of downside. It comes down to the Fed’s ability to rein in inflation.”

Although the economy and the trajectory of the housing market are a largely quantitative task, Ratiu said there must be extra attention given to understanding how people feel about the market — as feelings have the power to turn the economy upside down.

“We tend to look at numbers, we tend to look at data,” he said. “And then we say, ‘Well, based on what we’re seeing here is where we consider the market, economy, consumer confidence, etc. to be headed.”

“But so much of what we as humans use to make decisions comes from a gut feeling. A feeling of whether I feel confident or not, despite what the numbers say,” he added.

Ratiu said lifting consumer sentiments, which partially relies on the Fed and its monetary policy, will be key to finally thawing the market’s deep freeze.

“These emotions tend to be just as important as the numbers,” he said. “We don’t want to go into a spiral of doom.”

Email Marian McPherson

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