Impact Analysis: Inflation and Mortgage Rates in 2024

Inflation has been a persistent concern, affecting various sectors of the economy, including real estate. Danielle Hale, chief economist at realtor.com, highlighted at a recent summit that while there’s optimism for an improvement in the housing market in 2024, inflation remains a wild card that could derail forecasts. Although overall inflation has shown signs of easing, “shelter inflation” continues to rise, further complicating the market. The latest CPI reading showed a decline to 3.1% in November, but the continued rise in shelter costs remains a concern.

Mortgage rates, on the other hand, have had a tumultuous journey, with the 30-year mortgage rate spiking and briefly breaching 8% in October. However, forecasts are pointing to a potential decline, with some predicting rates as low as 5%, while Realtor.com is forecasting an average of 6.8%. This anticipated decrease in borrowing costs is expected to take some pressure off buyers, potentially slowing demand and contributing to a slight decline in home prices. Despite this, the supply shortage in the market is expected to worsen, primarily due to the limited decline in mortgage rates and the continuation of the “lock-in” effect, where homeowners are reluctant to give up their current low rates.

Further complicating market dynamics is the imbalance between supply and demand. The National Association of Realtors (NAR) has identified several markets with pent-up housing demand that are likely to see significant activity in 2024, including Austin-Round Rock-Georgetown, TX, and Nashville-Davidson-Murfreesboro-Franklin, TN. However, inventory shortages remain a major hurdle, as homeowners have been reluctant to sell due to the favorable mortgage rates achieved in recent years. This reluctance has contributed to near-record low inventory levels, making the market particularly difficult for first-time buyers.

On a positive note, the potential for mortgage rate declines and an easing of inflation could foster a more favorable environment for the housing market. Realtor.com Chief Economist Danielle Hale suggests that these changes could mark a significant improvement for buyers, potentially reducing the sense of urgency and pressure that has characterized the market in recent years. However, the continued lack of supply on the market, due in part to the “lock-in effect,” is expected to keep inventory levels low, posing challenges for both buyers and sellers.

In summary, the U.S. real estate market is at a crossroads in 2024, with inflation and mortgage rates playing a critical role in shaping its direction. While challenges remain, particularly in terms of inventory and affordability, there is cautious optimism for improvement. Buyers and sellers alike must stay informed and adapt their strategies to navigate the complexities of this evolving landscape. By understanding the impact of inflation and mortgage rates, stakeholders can make more informed decisions and potentially turn these challenges into opportunities for growth and investment.