A Return to "Affordability"? | 2024 Housing Market Predictions (UPDATE)

We're approaching the halfway mark of 2024, which seems like a good time to review where we are. So in this video, I'm going to review my housing market predictions for 2024, which I made back in October of last year and adjust them as necessary and make new predictions for the rest of the year. So first things first, I said back in October that I think prices would end this year, so December of 2024, that they would be relatively flat in terms of year over year terms. And I gave a range of negative four to four percent. So somewhere around zero plus or minus four percent. And I know that's a wide range, but this is a weird year. And my general feeling is that prices would moderate one way or another. So we wouldn't see a big swing up or down, but we'd see something relatively close to zero, which is normal in most years, but it's sort of different than what we've seen basically since the beginning of the pandemic. So that is the price forecast, which is what most people are focusing on. But housing market analysts also need to forecast volume, basically how many homes are for sale. And I said that these would also be relatively flat according to my predictions for the year, but maybe they would take up a little bit by December. So how am I doing? Well, for prices, I'm a little bit close, but not exactly. Prices are up about five percent year over year. So that's a bit higher than I had predicted. The high end of my range was four percent. But remember, my range is for the end of the year and we're only in May. So there is still time for prices to change. They could go up even more and then I'd be totally wrong or they could come down a bit and I'd probably be correct. So we'll get to that and whether I think I'm on track in just a minute. But first, let's go to the other side and talk about the home sales or total transaction volume that has stayed remarkably steady. It's actually down just a little bit year over year and seasonally adjusted terms, according to Redfin. So I'm right on, according to that. Now, before we actually move on, did any of you notice how similar the shape of those two charts are? They look almost exactly the same in terms of when they go up, when they go down, meaning that they're highly correlated. And just if you're curious, that's why analysts have to predict both. You need to understand housing sales volume to understand price and vice versa. They work together. So the question going into this video is what happens to sales price and volume in the rest of 2024? What variables are going to impact the housing market? I am going to assess and adjust my full forecast for you today. But before we get into that, I'm guessing that because you're watching this video, you guys love data just as much as I do. And to get deals, you need data, and it can sort of be overwhelming at where you should find it. But in actuality, you only need one data source, and that's PropStream. PropStream helps investors find motivated sellers in any market across the U.S. with hundreds of different filters. You can search both on and off market for properties. You can run comps. You can get in touch with sellers using built-in marketing tools, and you can analyze deals to your heart's desire. When inventory is tough to come by, like it is right now, PropStream is the key to finding your next property. Check them out at PropStream.com slash BP. OK, so my second half predictions. My thesis in 2024, if you watch my old video, why I came up with the forecast that I did is that this year is really all about affordability. Basically, how easy is it for the average American to afford the average priced home? And there are different components to affordability. So one is housing prices. That one's kind of obvious, right? How much are you paying for the house? The second one is your income and how much you are making if you can afford that house. And the third is, of course, mortgage rates. And where we are today is that prices are still super high and they're going up right now. And mortgage rates are much higher than they had been recently. And although wages are now growing above the rate of inflation just by a little bit, we have affordability at the lowest point it's been since the 1980s. And so this is why we see home sales volume so low like we were showing before and has not picked up at all. Demand is just pulling back, right? People can't afford homes. And so even though they want them, they are unable to afford them. And both of those are components of demand. And so there is less demand for housing right now. That puts downward pressure on both sales volume and prices. But the interesting thing about affordability and why it's so important in the housing market right now is because low affordability is actually having sellers pull out of the market. You may have heard of this idea of the lock-in effect, but basically it means that it's too expensive for people to move, right? Because if you go and sell your home, 70% of people go on to buy a new home. And if that new home is going to be really expensive, a lot of people are staying in place. Affordability, in my mind, is really what's giving us the housing market dynamics that we have today, where prices are still going up because even though demand is relatively weak, supply is even weaker. And that's why just not a lot of homes are selling in general. So the question for the second half of 2024 becomes what happens with affordability. And for that, we can look at the three variables I just talked about. We can look at home prices, but those are up as we discussed. So that's not going to help us improve affordability at all. We can look at real wages, which I'll put up on the screen here, and what real wages just means is that wage growth is up actually pretty high right now. It's like 4%. But inflation is also high. It's above 3%. And so what real wages, quote unquote, real wages means, it's basically when you subtract the wage growth from the rate of inflation, you get how much spending power is actually going up. And because wage growth is higher than inflation right now, wage growth is going up by about 1% a year. And that's better than where we were the last couple of years because it was negative the last few years. But obviously, that 1% growth per year is not going to really impact housing affordability, at least in 2024. So realistically, what might make a difference in this year is mortgage rates. And as you know, probably, mortgage rates have been on a roller coaster ride for much of the last few years, but they've been pretty volatile just here in 2024. They were trending upward a bit for most of the year, and then in April, they actually shot up from about 7% to 7.5%. And now, as of this recording in middle of May, they've come back down to about 7%, which is good. But I think there's going to be some resistance to it going much further. Why is that? Why do I think that? Well, first and foremost, it's really unclear what happens with the Federal Reserve and the federal funds rate. They've been saying that they're going to cut rates, but then inflation comes in hotter than expected, and then they pull back expectations. And so it's very unclear right now. I do think that the most likely scenario is that we will see at least some rate cuts by the end of 2024, because hiring is starting to slow. It's still positive. They added 175,000 new jobs in April, which is, in a normal time, would be a very good sign. But the Fed is trying to slow the economy. They're trying to weaken the labor market. And so this down from where it was a few months ago, where it's about 300,000, is a relatively good sign if you're hoping that the Fed is going to cut rates. The second thing is that inflation has been really up and down this year, which is making it very hard for the Fed to decide what to do. And so they're not being vague on purpose, I don't think. I think they genuinely are going to wait and see where the data comes in. Back in March, inflation was unexpectedly high. Then in April, it was unexpectedly low. So we're sort of just seeing this roller coaster and it's very difficult to forecast. Now, the most recent reading for April was actually pretty encouraging. We saw 3.4% for the CPI, which is the Consumer Price Index. That's like the broadest category of inflation. It's 3.6% for core inflation, which takes out volatile food and energy costs, which is still too high, don't get me wrong. But it is the lowest it's been since 2021. So at least that's encouraging, but still way higher than the Fed wants it to be. But when we talk about mortgage rates, all this reading into the Fed is helpful because it does impact the broader economy. But really, when you want to understand which way mortgage rates are going, you need to look at bond yields. This is really what dictates mortgage rates. And even if the Fed lowers rates, bond yields may not fall so much. My guess is that they will come down a bit because of a slower job growth, and slower job growth will impact the Fed's decisions and will also impact the bond market. And so my guess is that we're going to see the labor market continue to soften throughout 2024. And that should bring down mortgage rates, but I'm not expecting a lot of big movement here. We're at around 7% right now as of this recording. I think maybe they'll get into the mid sixes. If we're lucky, maybe into the lower sixes, but I'm not expecting to see huge changes in mortgage rates throughout 2024. But even a couple of percentage points, even if 50 basis points, if it goes from 7% to 6.5%, that will impact demand. It will probably keep it pretty steady or tick up a little bit. And yes, I do think that's true, even if job growth is slower. So I know a lot of people think, oh, if there are more layoffs, if there are more recession, if there is a recession, that's going to pull all the demand on the housing market. That's a perfectly viable opinion. That's not what I personally think. If you look at historical data, you see a lot of times what happens is in a slower job growth scenario and a recession scenario, the way the Fed fights that is by lowering rates and bond investors usually jump into bonds, which lowers yields and makes it much easier to buy a home. And so not everyone, maybe not as many people will have jobs, but the people who do will be more easily able to afford a home. And so you often see demand tick up in these adverse economic conditions. I know that's sort of counterintuitive, but that's what a lot of the historical data says. And so I believe that better affordability will sort of offset this weak labor market conditions. So the question is then if demand is going to be somewhat steady, but maybe tick up a little bit, what happens with supply? Because when you're trying to forecast prices, if supply goes up faster than demand, that is going to make prices weaken. And that's honestly what I think is going to happen. We're already starting to see new listings, which is the amount of homes that people list for sale, start to tick up year over year on a seasonally adjusted basis. And so that indicates more people, even though the lock-in effect is still there, are starting to sell their homes. If you look at this chart, we're still a far cry from where we were in 2021, 2022, but it is starting to increase. If you look at inventory, which is another way of measuring supply in the housing market, is up year over year and is on an upward trajectory. I think what's actually going to happen is my guess is that there are a lot of people who have been waiting to sell their home for rates to drop. And so we're going to see maybe a somewhat proportional increase in both supply and demand if rates come down a little bit. So that's my read of the situation. Hopefully this all makes sense to you. If you have any questions, just let me know in the comments below. But back to my predictions for 2024 from last October, I'm sticking with them. I still think prices are going to be plus or minus 4%, but things are trending more positively. So I think they're, you know, price, my guess for prices is that they won't end the year at 5% year over year growth. I think they'll come down to somewhere between zero and 4% year over year growth, meaning that price appreciation will cool in the second half of the year, but I think it's less likely that it will turn negative and we'll actually see losses this year. We'll have to wait to the end of the year to find out, but as I did this year in January, I always post a video talking about my predictions, whether I was right or wrong, and I'll absolutely do that in January. In the meantime, let me know what you think is going to happen in the second half of 2024 in the comments below. And don't forget to head to propstream.com slash BP to find motivated sellers nationwide so you can lock down your next real estate deal. For BiggerPockets, I'm Dave Meyer. Thanks for watching.