Persistent, challenging, and turbulent are just a few words that describe the mortgage and housing market of 2023. As we entered 2023, the future of the economy, housing market, and mortgage environment were extremely opaque, with many questions circulating after the Federal Reserve hiked the federal funds rate at an unprecedented pace in 2022.
Picture the real estate industry’s chessboard of uncertainty, where critical questions loomed like kings on the brink: How high would the Fed dare to elevate interest rates? Can the Fed get the inflation genie back in the bottle? Will the jobs market remain robust? Was the ominous shadow of a recession looming on the horizon? What happens to mortgage rates? Will home prices crash? And ultimately, what does it all mean for mortgage and housing demand? Although we may not have always been satisfied with the answers to those questions that developed throughout the course of the year, at least we now have answers that we can leverage in our framework for understanding the path ahead in 2024.
The likely result is
30-year mortgage rates
remaining range bound
in the 6s in 2024, but
not falling below the 6
percent mark barring
some unforeseen event.
The Fed: Battling Inflation
Say what you will about the Fed, but everything starts and ends with the monetary policy decisions they set. Most of the time, critics are quick to call out the Fed for raising or cutting rates too late. However, “hindsight is 20/20.” The Fed has a tough job with much at stake for the decisions they make, so of course they want to measure twice and cut once by remaining data-dependent in their actions. So far, so good.
Since peaking at 5.57 percent in February 2022, Core PCE (the Fed’s preferred inflation metric that excludes volatile food and energy components) fell to 3.68 percent in September 2023 with the Fed projecting a further fall to 2.6 percent at the end of 2024, and 2.3 percent at the end of 2025 before hitting their target of 2 percent by the end of 2026.
While there is a lag between tightening financial conditions and labor market conditions (the other half of the Fed’s dual mandate to stabilize prices and maximize employment), the jobs market remains resilient. The unemployment rate ticked up to 3.9 percent in October 2023 from the near historical low of 3.4 percent set in April 2023 and well below the full employment in mortgage rates below 5 percent with an overall effective mortgage rate on outstanding mortgage debt of 3.74 percent—to reconsider listing their homes for sale. This put downward pressure on new listings, suppressing inventory levels and therefore home sales, shrinking the pie of opportunity for lenders to serve. In addition to fewer home sales, rising rates have translated to more favorable conditions for all-cash deals, which rose to 36.6 percent of all single-family homes and condo sales in the third quarter of 2023. In 2024, these trends are likely to persist, resulting in a modest increase of 15 percent in purchase mortgage originations increasing the market size from $1.33 to $ 1.53 trillion.
Mortgage Market: Purchases & Refinancing to Rise
Demand for refinance mortgage loans remained non-existent after all but evaporating in 2022, as refinance applications nationally sputtered near record lows not seen since the year 2000. Cash-out refinances remained a limited area of opportunity for lenders given record levels of home equity among current homeowners. However, just like rate and term refinances, cash-out refinances seem to only be leveraged out of necessity presently. As households continue to feel the pinch on their finances and if rates decline as expected in 2024, enticing recent homebuyers to improve their financial position, we should see an uptick in the new year. This is precisely why forecasters hope to see refinances rising by approximately 56 percent year over year, growing from a $314 to $490 billion market, according to the Mortgage Bankers Association. As for the purchase side of the mortgage market landscape, activity remained muted, with purchase applications falling to historically low levels not seen since the year 1995. Unlike the refinance market, the low levels of purchase mortgage activity were not attributed to the demand side of the equation, but rather the supply side of the equation by way of a limited number of homes for sale. The unintended consequence of an abrupt rise in mortgage rates forced the nearly 40 percent of homeowners that own their home free and clear— along with 80 percent of current mortgage holders having locked-in mortgage rates below 5 percent with an overall effective mortgage rate on outstanding mortgage debt of 3.74 percent—to reconsider listing their homes for sale. This put downward pressure on new listings, suppressing inventory levels and therefore home sales, shrinking the pie of opportunity for lenders to serve. In addition to fewer home sales, rising rates have translated to more favorable conditions for all-cash deals, which rose to 36.6 percent of all single-family homes and condo sales in the third quarter of 2023. In 2024, these trends are likely to persist, resulting in a modest increase of 15 percent in purchase mortgage originations increasing the market size from $1.33 to $ 1.53 trillion.
Housing Market: A Supply-Demand Imbalance
The housing market can seem like a “riddle wrapped in a mystery inside an enigma” at times and 2023 certainly could be considered one of those times. Rising mortgage rates and a continued rise in home prices at the same time have pushed homebuyer affordability to the lowest levels ever witnessed. As of September 2023, just 37.4 percent of new and existing homes sold between the beginning of July and the end of September were affordable to families earning the U.S. median income of $96,300. Despite the deterioration in affordability that has seen a more than doubling in the median monthly mortgage payment since the pandemic, the market has remained competitive all year long. This was observed in various metrics, such as days on market, percent of homes off the market in two weeks, percent of homes sold above list price, average sale to list price, number of competing offers, and months’ supply just to name a few. The reason, as hinted above in our purchase mortgage outlook, all goes back to the imbalance that exists in the marketplace between supply and demand. There simply aren’t enough homes for sale to meet demand. In October 2023, the number of total homes for sale between new and existing stood at just 1.6 million below the pre-pandemic average of around 2 million and well below the all-time high of 4.6 million set during the great recession. To meet the supply-demand imbalance the market has shifted toward one that is relying more heavily on new home sales. Homebuilders have seen their share of total home sales rise from a low of just 4.9 percent in May 2010 during the housing market crash to 17.9 percent in October 2023 and from 5.0 percent in July 2011 to 28.1 percent as a share of total home inventory. Heading into 2024, we expect more of the same. Home sales are to remain near current levels. While housing affordability remains a limiting factor for many, buyers would be wise to hang in as the market remains supplyconstrained while homebuilders attempt to fill the gap. How? By continuing to build and offer incentives to make the mortgage math work for prospective buyers.
