This information was shared in a monthly newsletter published by Bay Street Capital Holdings, authored by Ila Corcoran.
Housing affordability hit a historic low in 2023, driven by the challenges of soaring home prices due to low inventory, in combination with elevated interest rates. This environment significantly diminished the purchasing power of prospective homebuyers, resulting in a market slowdown after the two-and-a-half-year bull run on home sales. The stagnant market conditions contributed to a record-low sentiment about the economy and the housing market, as indicated by Fannie Mae's November National Housing Survey, where 85% of consumers expressed the belief that the current period is unfavorable for homebuying.
Despite the gloomy outlook in 2023, economists are optimistic about a resurgence in the housing market in 2024. The anticipated softening of mortgage rates in the second half of the year, driven by a gradual inflation approach to the Federal Reserve's 2% target, is expected to act as a catalyst for revitalizing the market.
Inflation didn't heat up much in November. While core inflation (excluding volatile items like food and energy) is still higher, a big part of that is because the way we measure housing costs is a bit delayed. If we look at more up-to-date data on new lease agreements, rent prices were only up by 2.8 percent compared to a year ago. In contrast, the inflation rate for shelter costs in the Consumer Price Index (CPI) in November was 6.5 percent.
As these new lease agreements catch up in the CPI, we expect the core inflation to gradually come down closer to 2 percent. The recent good news on inflation aligns with the Federal Reserve's (FOMC) more cautious approach. They've decided not to raise interest rates further and even hinted at a possible rate cut next year. While the markets are predicting more cuts than the Fed is suggesting, we anticipate the Fed will be careful, considering the risk of inflation picking up again if they ease policies too quickly.
Does this mean it may get easier to buy a home next year? Well, maybe. Rate decreases will increase buying power and allow more buyers to enter the market. This, however, will exacerbate the existing supply/demand issue we have, where inventory is far too low to support the demand of buyers. While we could see more competiton for homes next year, we will likely see many buyers close on homes with a more agreeable rate than they would today.
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