The economy is strong and we expect continued strength through most of 2024. Unemployment is still historically low, real wages have been rising, all-time high domestic oil production is helping to lower gas and fuel oil prices, and GDP growth is strong.
Housing, remains one of the primary economic headwinds for the U.S. Home prices continue to inflate, contributing heavily to the total inflation that still exists. The increases in the Fed Funds rate have radically curtailed non-housing inflation and have done nothing to lower housing prices, making overall affordability worse due to higher mortgage rates. This was a foreseeable negative side effect of the inflation fight, which we warned of previously and have commented on since. This is worse than in previous cycles due to the deep and persistent, and worsening, housing shortage. Overall, we judge the Fed’s inflation fight to have been absolutely necessary and successful. The failure has been in our inability to address the housing shortage through other means.
Other potential headwinds for the economy are the national debt, geo-politics, and domestic unrest. These are each difficult and complicated challenges which deserve their own attention. For our purposes, we must assume that these challenges will remain more or less status quo for the next 12 months, as a major change in any of them could significantly derail any forecast.
THE RATE ENVIRONMENT
We expect the Fed Funds Rate to move lower in 2024; however, we believe that some Wall Street expectations of 6 rate cuts totaling up to 300 basis points are wishful thinking at best, and would be a reckless position for the FOMC to adopt, unless there is an economic crisis or recession. As long as there is no financial or economic downturn of significant proportions, our expectation is that there will be no Fed Rate cut prior to June, although a small cut of perhaps 25 basis points in March is not out of the question. Our estimate for total Fed Rate reductions is no more than 4 cuts for a total of 100-150 basis points for all of 2024.
This is due to the simple fact that if rates are too low, the Fed will lack all the tools it may need to respond to a severe downturn. We judge the current FOMC members to be more cautious and prudent than that. We seem to have reached the “higher” portion of “higher for longer.” Now we should expect a narrower range of rates for some period of time. Our expectation and hope is that we will see no rate cuts prior to June 2024, and that once this course is evident, mortgage rates will begin to normalize organically. This should result in mortgage rates well below the 50-year moving average (our target on the 30-year mortgage is 5.58% by Q4 at the latest, possibly much sooner) and leave the Fed with adequate room in rates to respond to an economic downturn, should one materialize in the future. If the FOMC cuts the Fed Rate more than 150 basis points, the 30-year mortgage should fall even lower than our forecast.
We still are not seeing a normalization in the delta between the 10-Year Treasury and the average mortgage rate, but we believe conditions are right for this to begin. This will mean somewhat lower mortgage rates later in the year without need for additional Fed cuts. Our estimate is that absent any rate cut by the FOMC, we could still see 30-year mortgage rates as low as 5.6%. This is a market-driven response and depends largely on confidence in the Fed and reduced rate volatility. This may take some time, but the longer the Fed maintains rates in a narrow range, the more likely we will be to see this normalization.
NO HOUSING PRICE CRASH
There will not be a housing crash and, in fact, prices will rise for the year, nationwide and locally. Demand remains high and available housing inventory remains historically low. Many have expected a crash due to the widespread perception that homes are simply unaffordable or that prices rose too quickly. Rising wages and various housing assistance programs have managed to keep more buyers in the market than homes for sale. While lower mortgage rates may free up some owners to sell, they will also bring more buyers back into the market. In such a lopsided demand environment, prices cannot and will not come down, barring a historic collapse of the national economy, and there is no indication that we are approaching any such collapse. In fact, the economy is, by virtually all measures except housing, quite strong.
A SEVERE AND WORSENING HOUSING SHORTAGE
New household formation will result in an exacerbation of the nationwide housing shortage. Currently, the Census Bureau expects 2 – 2.4 million new households were formed in 2023. Meanwhile, Housing and Urban Development estimates that only about 1.45 million homes were built in the same period. The shortfall deepens a shortage already estimated to have been between 3.5mm and 6mm homes. For much of the year many analysts assumed that rapid home building was closing the gap, but it now seems to be getting worse. We believe this means housing prices will rise, not fall. If mortgage rates come down as we expect, in a shortage environment, prices will rise to absorb affordability. This means more home buyers will qualify under lower rates but prices will rise due to increased demand and overall affordability will not improve and may worsen.
Affordability may improve, but only if the inventory coming to market is sufficient to counter the increasing demand caused by falling rates or outpaces new household formation. With the vanguard of Gen Z now entering the household formation phase of life, the expectation is that household formations will only increase going forward.
The demographic data indicates that, while Gen X is slightly smaller than the Boomers, The Millennials are a larger generation than the Boomers, Gen Z is larger still, and Gen Alpha will be even larger. While many had hoped that Boomers passing on or moving to retirement communities would free-up housing inventory, it’s clear that the Boomers and Gen X combined cannot clear nearly enough housing space for the oncoming generations. We simply must build much more housing, much more quickly.
For affordability to improve, the inventory of housing at all price points below the luxury level ($1,000,000 locally) must not only increase but accelerate significantly, or increased demand due to falling mortgage rates will result in housing becoming even less affordable. It remains to be seen how much worse affordability can get before the market is forced into a pull-back. Increases in federal loan limits and military housing allowances seem likely to support rising prices for some time, at least for a portion of the population. Others will have an increasingly difficult time buying.
With regard to affordability in our market, we are seeing an ongoing tale of two economies. Those receiving military benefits to aid in housing or those earning higher than typical salaries in support of federal government agencies and projects are finding it easier to afford housing than those earning purely civilian sector wages. In Tidewater we are clearly in a crisis of available and affordable workforce housing for the civilian population. This will only be mitigated by increasing supply in the region significantly to arrest rising prices and allow the lowering rates to create an improved net affordability.
THE RENTAL PARADOX
Increased rental inventory is not a solution because it has proven to not address home ownership demand. Therefore, more rental availability does not alleviate housing demand and contributes to the spiraling lack of ownership affordability. Evidence of this can be seen in the current downward pressure on rents, even as home prices continue to rise. Overwhelmingly, consumers prefer to own rather than rent. This means that new rental development is yielding a diminishing return, and the less efficient use of those resources of land, labor, and material, actually exacerbates the affordability crisis for home ownership.
Without aggressive action by elected officials, spurred by active citizens, we expect this condition to worsen. The effects this year will be ongoing challenges to home affordability, but the long-term reduction in the wealth of US citizens will set the stage for a much more difficult financial outlook for the entire nation over the next decade and beyond. The average net worth of a homeowner is more than 57 times greater than the net worth of the average renter. That net worth allows for secure retirements, business formation, educational opportunities, an enhanced tax base, and too many more individual and social goods to list here.
We do not intend to convey that there is no place for rentals in the marketplace. Some people prefer to rent, some are unable to buy a home, and for some, ownership may not make sense because of work or other concerns. However, the proliferation of “market rate” rental development, when there is a dire shortage of homes for ownership, limits the ability of people to own homes now and hinders their ability to save to buy in the future. To address the shortage and avoid a deepening crisis, priority must be given to development for ownership, at all price points.
It is our view that returning to the original concept of the American Dream, that every citizen be able to own their own home, is critical to the long-term economic health, net wealth, and international economic competitiveness of the entire nation. Home ownership serves both the social justice and patriotic imperatives of the nation. It is a net good for all Americans and we believe it must be made one of the highest priorities at all levels of government.
For 2024 we expect a generally strong economy, especially through the summer. If there is a slowdown, we would look for it in the second half, but we do not expect the beginning of a recession this year. Housing prices will continue to rise and mortgage rates will come down, but overall affordability will not improve unless and until we dramatically increase the number of homes built for sale. We do not see market-rate rental development as a short-term solution, but we do believe it can be a long-term drag on the overall economy. It is our position that for the good of the nation, citizens and government officials at all levels should make addressing our housing crisis a top priority and make the availability of home ownership for all Americans who desire it, a national and long-term effort.
This forecast contains forward looking statements, the accuracy of which cannot be guaranteed, and no investment or financial decision should be based on these statements alone. Please consult your financial or realty professionals before making any financial or realty decision. This forecast is the intellectual property of The Home Run Team Ltd. and any sharing, re-posting, or quoting of it must be properly attributed to The Home Run Team.
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