Unless you have been living under a rock for the past three years, you know that home prices have been elevated since 2020. The initial spike occurred because of low interest rates, and it has continued due to the lack of housing supply. So when everyone asks me when real estate prices will start to come down, what they really want to know is when more houses will come to the market, increasing the supply, and offsetting the high home prices.
I personally don’t think we will see a major housing correction anytime soon. This is because I don’t think we will have enough of a housing supply coming to the market to lower prices. Below, I am going to go over the factors at play that I believe will keep inventory low into 2025.
Interest rates are the biggest factor that will keep the supply of homes listed for sale very limited. Currently, rates sit at around 7.5 percent, which historically is not high. However, at the low point during the pandemic interest rates sat closer to 3 percent. This 4.5 percent difference is a lot of money when looking at a monthly payment.
To put it into perspective, If you had a thirty-year $400,000 mortgage at 3 percent interest, you would be paying roughly $1,700 monthly. That same $400,000 mortgage at 8 percent would now cost you roughly $2,800. So even if a homeowner is looking to replace their home with one of equal value, they would be almost doubling their mortgage payment each month. Even those looking to downsize are realizing the cost of their new smaller home may have the same payment as the home they currently live in.
I know the Federal Reserve has discussed cutting rates this year. However, I believe these cuts will be small—maybe a quarter of a point each. Once they start to cut, you will see housing pricing climb back up as demand increases. It would take interest rates moving back under 5 percent, in my opinion, to make those sitting on low rates list their homes. I don’t see that happening in 2024.
Not only are homeowners not selling, but builders are not building. Now you may be thinking that’s not true because you have construction all over your town. Those cranes are from projects already started that need to be finished. Hardly any new projects are starting at this time. At MC Companies, we have shelved six of the land deals we were planning on building. Rates are too high, building costs are too expensive, and bridge loans are too uncertain.
Expect an increase in rental supply in 2024 from these construction projects. However by 2025-2026 when nothing new is coming to the market, you will once again have a rental/housing shortage.
There is a lot of talk about a recession being right around the corner. Recessions make people nervous and make them want stability. They try to not take on additional and unneeded expenses. Homeowners are trying not to get stuck with something they can’t afford so they are choosing to sit tight until the economy stabilizes. This diminishes the number of homes being listed. Some are still talking about a soft landing and the Federal Reserve may just pull that off, but no one knows for sure just yet.
However. . .The moral of the story is we need supply. Even though I just listed why I don’t see a large supply of homes coming to the market anytime soon, there is one event that could trigger a surplus of houses being listed. The only thing that could be a catalyst for supply is a large recession. Extensive job loss will make people sell their homes and that will add supply, hence lowering prices. As of now, I don’t see that happening, but we have been on a wild ride the past three years and I am closely tracking the economy into 2024.