February 22, 2024

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Existing home sales rose 3.1% in January to a 4,000 thousand pace after having declined 0.8% in December  Sales had been falling for almost two years as the combination of sharply higher mortgage rates and higher home prices took their toll  But home sales have also being curtailed by limited supply and an unwillingness of current homeowners to put their homes on the market because they would be forced to trade in the 3.0-3.5% mortgage rate on their current property for a rate of 6.8%.

Lawrence Yun, NAR chief economist said that, “While home sales remain sizably lower than a couple of years ago, January’s monthly gain is the start of more supply and demand.  Listings were modestly higher, and home buyers are taking advantage of lower mortgage rates compared to late last year.”  He added that, “Multiple offers are common on mid-priced homes, and many homes were still sold within a month. The elevated share of cash deals – 32% – indicated a market full of multiple offers and propelled by record-high housing wealth.”

Mortgage rates rose from 3.1% at the end of 2021 to 7.8% but have since retreated to the 6.9% mark.  With the pace of economic activity remaining slow but steady and inflation continuing to slow gradually, mortgage rates have probably peaked and will gradually decline throughout 2024.  By the end of 2024 we expect mortgage rates to be about 6.25%.

The average home sat on the market for 36 days in January which is considerably longer than other recent months, but that could be a function of the particularly bad weather that we had in that month.

As has been the case for a long time, there are very few homes available for sale.  There are simply not enough homes for sale.  The market can easily absorb a doubling of inventory.  Inventory dropped 0.1 month in January to 3.1 months which is well short of the 5.0 month supply that is required to balance the demand for and supply of homes.  When the housing market collapsed in the 2008-09 recession this number peaked at about 11.0 months as many homeowners had adjustable rate mortgages which re-priced upwards and were unable to afford the new, substantially higher monthly payments.  Foreclosures were common.  The situation today is completely unlike that troubled period.

Home prices fell 1.7% in January to $379,100 after declining 1.0% in December. This is the sixth  consecutive month that prices have fallen.  The year-over-year change is now an increase of  5.7% but, more importantly, sellers have been accepting slightly lower prices in recent months to get the deal done.

Housing affordability has dropped from where it was at the end of 2021 as home prices rose sharply and mortgage rates climbed from 3.0% to 7.8%.   Housing affordability fell from a peak of 170 in the early part of last year to 91 in October This means that potential home buyers had 9.0% less income than required to purchase a median-priced home.  Since the onset of recession in March 2020 the monthly payment on a median-priced home rose from roughly $1,000 per month to $2,200 per month.  At the same time the required down payment climbed from about $55,000 to $80,000.  Many first time home buyers were priced out of the market.  But housing affordability has begun to turn upwards.  Mortgage rates have already fallen about 1.0% from their peak and should gradually decline in 2024 as economic growth remains moderate while inflation continues to slow.  The Fed should help in the second half of next year by beginning to lower the Fed funds rate.  At the same time continued job gains and rising hourly wages will boost consumer income.  We expect affordability to rise significantly as 2024 progresses and a median-income earning family should have 25% more income than required to  purchase that median-priced home by yearend.

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Given all of the above we expect existing home sales to rise about 14.0% in 2024.

We expect GDP to rise 1.8% in both the first and second quarters of this year. followed by 2.0% growth in the second half of the year.

Stephen Slifer

NumberNomics

Charleston, S.C.