How 2023's Housing Market Conditions Are Affecting the 2024 Market

Despite being well into 2024 already, it's now possible—and important—to look back at the previous year as a reminder of those housing market conditions and how they're likely to affect the current year. It really is a tale of two housing markets, between the upheaval of the resale sector to the pleasant if generally unexpected gains in the new-home segment, and as I wrote in "Advice for Home Builders Navigating a Housing Market in Flux" in 2023, a builder's best bet is to plan ahead.

Several factors influence housing market conditions, including existing-home sales and new-home sales, mortgage interest rates (and the policies driving them), and new-home construction activity, among others. Here's a quick recap of what those factors did in 2023 and a glimpse into how 2024 is shaping up by comparison.

A Look at 2023 Existing-Home Sales

At just a little more than 4 million homes sold during 2023, the existing-home market registered its weakest sales pace in 28 years.

Persistently elevated mortgage interest rates, low inventory of for-sale homes, and lack of affordability all contributed to this collapse—a decline of 18.7% (about 5 million sales) from 2022 and 33.2% from the 2021 sales rate of 6.12 million. Annual sales of 5 million is historically the balancing point for existing-home sales for a strong market or a weak market.

December’s existing-home sales pace was 3.78 million, which was down 1% from the November pace and 6.2% off the sales pace registered in December 2022. This monthly seasonal pace for existing-home sales was the slowest recorded since 2010, at the end of the Great Recession.

As 2023 closed, there were approximately 1.0 million existing homes on the market, equating to a 3.1 months of supply—13.6% above the record low inventory of 880,000 or only 2.3 months of supply in 2021, and a 4.1% improvement over the 960,000 homes or 2.7 months of supply in 2022. 

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The median sales price for a resale last year was a record high $389,800. However, because of the weakness in the market, the median sales price was only 0.9% over the median price recorded in 2022, and 11.2% over the $350,700 registered in 2021.

On a month-over-month comparison, December 2023 was the sixth consecutive increase in the median sales price, recording a 4.4% increase over December 2022. Meanwhile, the gap between the median sales price for existing homes and that of new homes has diminished to approximately $30,000, in favor of resales. 

The narrowing of this gap, and the ability of home builders to offer incentives, price concessions, interest rate buy-downs and rapid-delivery homes, has made the new home market very competitive with the existing-home market for the home buyer and the real estate sales community.

How Were New-Home Sales in 2023?

Last year was better than home builders originally expected. At the beginning of 2023, those in our network were projecting a 30% decline in activity due to nagging inflation, high mortgage interest rates, and the potential of a recession. 

But the early part of 2023 outperformed, with builders revising their projections during the first quarter. Home sales were fairly stable throughout the year except for an unexpected slump during November, which then reversed in December. 

Overall, new-home sales increased by 4.2% from 2022, to 668,000, with the South showing the strongest growth at 5.2% year-over-year. However, new-home sales in 2023 were below the 2020 total of 882,000 by 18.7%. If the Federal Reserve is able to gain the upper hand on inflation and the 30-year mortgage interest rate drops to 6.0% or less, sales should reach their 2020 level this year.

The median sales price for a new home actually declined by 6.6% during 2023, to $427,400 from $457,800 in 2022. Home builders were able to modify their product mix to offer smaller footprints, incentives, and pricing discounts to stimulate sales. On a year-over-year basis, the median sales price dropped by 13.8% from $479,500 in December 2022 to $413,200 in December 2023.

New-home inventory remained fairly consistent at between 425,000 and 450,000 homes. The mix of inventory changed during the year to more completed inventory, which expanded by 22.2%. 

In 2023, home builders responded to the need for rapid-delivery homes resulting from the lack of inventory of existing homes, and by year-end there was about 8.2 months of supply of new homes, though most of it wasn't ready for delivery, with 58.5% under construction and 23.6% not yet started. At the end of 2023, only about 18% of the inventory was completed and ready for delivery.

The Effect of Mortgage Interest Rates on Home Sales

As of May 2024, the 30-year fixed Freddie Mac mortgage rate had dropped almost a full percentage point to 7.09% from the peak rate of 7.8% during the final week of October 2023, stimulating both new-home and existing-home sales. 

If the Federal Reserve eases its monetary policy and begins reducing interest rates further—which it recently indicated may happen—it will drive up home sales activity even more. 

Even so, the existing-home sales market will take some time to build inventory in response to lower interest rates, allowing new-home builders to leverage rapid-delivery homes to take advantage of the rate cuts ahead of the resale market.

Single-Family Home and Multifamily Housing Starts Data for 2023

The total number of building permits for 2023 was down 11.7% from 2022, recording 1.469 million permits. Single-family permits dropped 6.9% to 908,000 and multifamily permits were off 18.5%. On a year-over-year basis, total permits were up 6.1% with single-family permits expanding 32.9% and multifamily permits contracting 26.6%. 

The second half of the year was strong for the single-family sector, but weak for multifamily because of the cost and availability of credit, softening rental markets, rising vacancy rates, and more than 1 million units under production—a level not seen since 1973.

Total housing starts in 2023 were down 9.07% from 2022, registering 1.413 million units. On a year-over-year basis, total starts were up 7.6% in December 2023, while single-family starts recorded a 15.8% increase with improving strength throughout the year. Multifamily starts were down 9.5%, revealing a continuing weakness throughout the year.

What Housing Market Conditions Looked Like at the End of 2023

At the end of 2023, home builders were becoming more optimistic with the prospects of the Federal Reserve lowering interest rates, as well as the slow if steady decline of price inflation and improving consumer sentiment. 

In spite of the 525 basis point (bps) increase in the Fed’s funds rate since March 2022, the U.S. economy continued to expand. The core personal consumption deflator rose at an annualized rate of 2% for the second quarter, leading to speculation that the federal Open Market Committee (FOMC), the body that rules Fed actions, would begin cutting rates of 25 bps this spring. That would be a switch from the FOMC’s last four sessions, after which it left the funds rate unchanged. 

If the Federal Reserve eases its monetary policy and begins reducing interest rates further—which it recently indicated may happen—it will drive up home sales activity even more. 

In the fourth quarter of 2023, gross domestic product (GDP) grew at an annualized rate of 3.3%, which was stronger than anticipated. Real consumer spending failed to slow, with discretionary spending outpacing non-discretionary spending and the increased use of credit cards.

In January 2024, consumer sentiment rose to its highest level since 2021, posting the largest two-month gain since the early 1990s. 

The Institute of Supply Management (ISM) Non-Manufacturing Index, a metric based on surveys of service industry purchasing and supply executives, posted the largest monthly gain since August 2012, moving into expansionary territory. In fact, 15 service industries experienced increases in prices paid during the month. 

Meanwhile, the monthly Construction Price Index (CPI) from the U.S. Census Bureau that month was hotter than expected, with the core services inflation registering its largest gain in 16 months. 

These reports are setbacks for the FOMC to begin cutting interest rates at this point. Since the beginning of the year, interest rates have been on the rise, registering a 6.77% rate on Feb. 15. The Leading Economic Index (LEI) fell again in January, marking the 23rd straight month this composite of leading indicators has been warning of a recession. This is a run never before seen without a recession. 

What's the Housing Forecast for 2024?

Wells Fargo’s latest forecast for housing predicts that total housing starts will increase by about 0.5% to 1.42 million, consisting of a 4.4% increase in single-family starts and a drop of 7.7% in multifamily starts. Existing-home sales are expected to increase by 6.6% to 4.36 million. New-home sales will see growth of 7.2% to 716,000. 

The median new-home sales price is expected to increase just 2.2% to $436,800, while the median sales price for existing homes is expected to increase 3.1% to $406,800, which will maintain a spread of $30,000 between the new and existing median home price. 

For the conventional 30-year fixed rate mortgage, Wells Fargo forecasts that the annual average rate will decline from 6.8% to 6.45%, which will stimulate both new-home sales and existing-home sales and existing-home inventory.

Home builders have turned to building more speculative homes for rapid-delivery programs with the shortage of existing-home inventory. Builders should monitor their level of spec inventory, establishing maximum limits by community. 

The National Association of Realtors (NAR) is forecasting that total housing starts will increase to 1.48 million in 2024, which will consist of 1.04 million single-family starts and 440,000 multifamily starts. 

According to NAR, new-home sales will increase by 19% with the anticipated reduction in mortgage interest rates and home builders continuing to stimulate sales with discounts, concessions, and interest buy-downs. NAR is forecasting existing-home sales to increase by 13.5% to 4.71 million, which is still below the historical norm because of the lack of available inventory.

Based on recent weakness in its Wells Fargo-Housing Market Index reports, the National Association of Home Builders’ chief economist Rob Dietz is conservatively predicting between 3% to 4% growth in single-family housing starts in 2024, which equates to roughly 945,000 homes.

Most economists are forecasting an ongoing slowdown of 20% to 25% in multifamily construction during 2024, due to tightening financing conditions, softening demand, increased vacancies, and approximately 1 million units already in the construction pipeline coming to market this year.

A Note of Caution for Home Builders

2024 is an election year with the probability of a change in the White House. The current administration will work to make sure the economic numbers look good, including pressure on Fed Chairman Jerome Powell and the FOMC to more quickly and deeply reduce the funds rate to stimulate the economy, even if inflationary pressures are still present. In my opinion, the chances of false signs of economic strength are highly probable. 

As mentioned above, the LEI has been declining for 23 straight months, signaling a potential recession. Retail sales, manufacturing production, and residential construction were weaker than expected in January 2024. Consumers are still spending like drunken sailors, especially on services, building up their consumer credit card debt. Fifteen industries in the service category have reported increases in prices paid during January.

Also in January, housing starts dropped by 14.8%, with single-family and multifamily starts declining 4.7% and 35.8% respectively. As of mid-February, the Freddie Mac rate for a 30-year fixed rate mortgage increased to 6.77%, while The Mortgage Bankers Association reported a 6.87% rate and Mortgage News Daily’s national rate was 7.14%. These increased rates will likely have an impact on first-quarter sales. 

The current economic environment feels very similar to the long lead up to the 2008 recession, so be cautious this year! Scrutinize the national economic headline news coming out of Washington to make sure you're seeing the same trends in your local communities.

Home builders have turned to building more speculative homes for rapid-delivery programs with the shortage of existing-home inventory. Builders should monitor their level of spec inventory, establishing maximum limits by community. 

When the market softens, spec very quickly becomes finished inventory. Don’t get caught. There are too many cautionary flags. Stay diligent and minimize your potential exposure to a rapid change in the economy, especially after the election.

Frequently Asked Questions About the Economy and 2024 Housing Market Trends

What is the Federal Reserve's rate forecast for 2024?

During the May 2024 Federal Open Market Committee (FOMC) meeting, the Federal Reserve unanimously voted to maintain policy rates at the current range of 5.25% to 5.5% for the sixth consecutive time.

What is the Federal Reserve's interest rate forecast for 2025?

According to the CME FedWatch tool—an online tool that uses futures pricing to predict rates and estimate the likelihood of the FOMC changing federal funds rates at upcoming meetings—by April 2025, there's an 80% probability that the Fed's rate will be 4% or higher.

Is the economy at risk of a recession?

The likelihood of the U.S. economy entering a recession within the next 12 months has now dropped to its lowest level in two years (33%), according to the latest quarterly economists’ poll from financial information website Bankrate.