A Perfect Storm
The U.S. Housing Market in 2024
During the early 2000s, the market saw over 6 million homes change hands annually as reported by the NATIONAL ASSOCIATION OF REALTORS ®.
As 2024 draws to a close, the U.S. housing market is on track for its worst performance in nearly three decades. The last time sales were this dismal was in 1995. Today’s challenges are driven by a perfect storm of high mortgage rates, affordability, and supply constraints that have created a near standstill.
Existing home sales in 2024 have fallen by about 15% compared to 2023, with projections indicating fewer than 4 million homes will be sold by year’s end, a number not seen since the mid-1990s.
This sharp (30+%) decline isn’t an isolated phenomenon. The housing market has been cooling since the Federal Reserve raised interest rates starting in 2022 to combat inflation.
Recent History
The U.S. housing bubble of the 2000s had profound and long-lasting effects on the economy, characterized by rapid growth, speculative investment, and ultimately, a severe collapse.
The US housing bubble of the 2000s had one of the longest-lasting effects on economic history. Amazing growth, exuberant optimism, and unheard-of real estate speculation characterized the period. But a tempest of unhealthy routines and risky financial practices was hiding beneath the wealth’s outward appearance.
When the US stock market bubble cracked in 2002, investors lost faith, and millions dashed to real estate as a safe haven, causing the housing bubble to swell significantly. This price race impacted supply, leading to the construction of new properties to go through the roof. By 2002, house ownership had increased by nearly 25% compared to the pre-bubble.
Causes of the Housing Bubble
Speculative Investment: After the stock market cracked in 2002, many investors turned to real estate as a safer investment, driving up demand and prices. This speculative behavior was fueled by the belief that housing prices would continue to rise indefinitely.
Subprime Mortgages: Lenders issued a large number of high-risk subprime mortgages to borrowers with poor credit histories. These loans were often bundled into mortgage-backed securities (MBS) and sold to investors, spreading the risk across the entire U.S. financial system.
Low Interest Rates: Following the 2001 recession, the Federal Reserve implemented an accommodative monetary policy to stimulate economic recovery. This involved reducing the federal funds rate from 6.50% in December 2000 to 1.75% by December 2001, and further down to 1.00% by June 2003. The Federal Reserve's low-interest rate policy in the early 2000s made borrowing much cheaper, enabling more people to take out mortgages and invest in real estate.
This prolonged period of low interest rates made borrowing cheap and accessible, enabling both consumers and investors to take on more debt. As a result, a substantial increase in mortgage lending occurred, including high-risk subprime mortgages, which were often repackaged into mortgage-backed securities. This availability of cheap credit triggered a surge in demand for housing, driving up home prices and fueling speculative investments in real estate.
Questionably Lax Lending Standards: Financial institutions relaxed lending standards, allowing more people to qualify for mortgages without sufficient verification of their ability to repay
The low interest rates, intended to support economic recovery and prevent deflation, led to financial imbalances encouraging excessive risk-taking and leverage among investors. This environment of easy credit and rising asset prices contributed to the housing market's unsustainable growth and its subsequent collapse during the financial crisis of 2007-2008.
This period ultimately culminated in the housing bubble's burst around 2007-2008, leading to a significant downturn in the market. The U.S. economy was severely shaken when the bubble burst and the ensuing recession caused massive foreclosures, financial instability, and a long-lasting effect on the lives of millions.
The recession's effects extended beyond immediate economic conditions, causing "economic scarring".
Massive declines in home values resulted in mortgage defaults. Home prices fell by over 20% from their peak. Over six million American households (approximately fifteen million people) lost their homes to foreclosure, and unemployment rates doubled from less than 5% to 10%, affecting approximately 16.8 million additional people or nearly seven million additional households.
It also affected educational attainment, private investment, and long-term income potential for millions of Americans.
What’s next for the U.S. housing market?
Federal Reserve Rate Cut: - In September 2024, the Federal Reserve reduced the federal funds rate by 50 basis points, bringing it down to a range of 4.75% to 5%. Despite recent efforts by the Federal Reserve to stimulate the market, particularly through the rate cuts, these measures have failed to breathe life back into the housing sector.
Although the Federal Reserve cut the federal funds rate by 50 basis points in September 2024, mortgage rates remain relatively high. They have decreased from their peak of 8% in October 2023 to around 6.2% as of mid-September 2024. However, these rates are still significantly higher than those seen during the ultra-low-interest rate period of 2020 and 2021, making homebuying still unaffordable for many Americans.
Inflation: - in the United States has now decreased, reaching 2.4% as of September 2024, and overall economic conditions are expected to remain stable with positive GDP growth and continued job gains projected for the remainder of 2024. This inflation decline marks a return to pre-pandemic levels.
While inflation has come down, the housing market still has not rebounded. Historically, lower interest rates make borrowing cheaper, spurring demand for homes as consumers take advantage of reduced mortgage rates. However, the rate cuts have failed to have a meaningful impact on the U.S. housing market. Many homeowners are still locked into low mortgage rates from previous years, stifling new listings, and many potential buyers continues to grapple with high borrowing costs and inflated prices.
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Today, home prices are much higher than they were at their peak in 2007, when the housing bubble burst. Following that peak, the market dropped by 60%, bottoming out in 2012.
Why Aren’t Fed Rate Cuts Working?
In an effort to stimulate the economy and boost sectors like housing, the Federal Reserve began cutting interest rates in September of 2024 after months of sustained increases. Historically, lower interest rates make borrowing cheaper, spurring demand for homes as consumers take advantage of reduced mortgage rates. However, the rate cuts have so far failed to have a meaningful impact on the U.S. housing market.
Here’s why:
Mortgage Rates Remain High: Despite the Fed’s rate cuts, mortgage rates have not fallen significantly. This is because mortgage rates are not directly tied to the Federal Reserve’s short-term interest rate. Instead, they are influenced by the yield on the 10-year U.S. Treasury bond, which has remained elevated due to persistent concerns about inflation and long-term economic stability. As a result, mortgage rates are still hovering around 7%, far above the 3-4% range that characterized the market during the pandemic.
Financial Challenges: Many Americans find themselves in financially precarious positions due to depleted savings and increased debt following the pandemic, which has significantly impacted their ability to purchase homes. Americans have spent the excess savings accumulated during the pandemic, which peaked at $2.1 trillion in August 2021. By March 2024, these savings were fully depleted, leaving many without a financial cushion. Consumer debt levels have increased, with more Americans falling behind on credit card payments. This financial strain is exacerbated by high non-mortgage-related housing costs, such as taxes, insurance, and maintenance.
Housing Affordability: Housing affordability is at its lowest level in over 30 years. While home prices have moderated in some areas, they haven’t fallen nearly enough to offset the higher mortgage costs. Even with rate cuts, the average American household continues to struggle to afford a home, especially in major urban centers. Rising wages have not kept pace with home prices, further exacerbating the issue.
Buyer Sentiment Has Shifted: Even with slightly lower rates, buyer confidence remain shaken. Many prospective buyers, especially first-time homebuyers, have either been priced out of the market or are choosing to delay purchasing due to fears that housing prices could drop further. The uncertainty surrounding future rate movements and home values has kept buyers on the sidelines, resulting in lower demand despite the Fed’s rate cuts.
The Lock-In Effect: A significant portion of existing homeowners locked in historically low mortgage rates during the pandemic. These homeowners are reluctant to sell their homes and take on a new mortgage at today’s much higher rates, even if they would otherwise be interested in moving. This "lock-in effect" is a major contributor to the limited housing inventory, which is compounding the affordability crisis and stagnating market activity.
Limited Inventory Persists
One of the most significant factors contributing to the housing market’s stagnation is the ongoing shortage of available homes. The housing market has been undersupplied for years, and while new construction has increased in recent years, it has not been enough to make up for the shortfall.
Builders continue to face challenges:
Rising Material and Labor Costs: Supply chain disruptions that began during the pandemic and inflationary pressures have driven up the cost of building materials. Labor shortages in the construction industry have also delayed projects and increased expenses.
Low Turnover of Existing Homes: As noted earlier, existing homeowners are not incentivized to sell, further limiting the supply of homes on the market.
This supply-demand imbalance is one of the main reasons why the Fed’s rate cuts have had minimal impact on the housing market. Even if buyers are interested, there simply aren’t enough homes available at prices they can afford.
Ripple Effects Across the Economy
The housing market plays a vital role in the broader economy. A downturn in home sales has far-reaching implications, affecting industries such as construction, real estate, banking, and retail. With fewer homes being sold, demand for related goods and services, like home renovations, appliances, and furnishings, has also declined. This slowdown has the potential to reduce job growth in these sectors and could contribute to broader economic stagnation.
What Lies Ahead for the U.S. Housing Market?
Looking ahead to 2025, the outlook for the U.S. housing market remains uncertain. The Federal Reserve may continue cutting rates in an effort to stimulate demand, but if mortgage rates remain elevated and affordability challenges persist, it’s unclear whether these measures will be effective.
Several factors will influence the 2025 housing market:
Economic Stability: If inflation continues to remain at pre-pandemic levels and the broader economy avoids a recession, consumer confidence could improve, bringing buyers back into the market.
Mortgage Rates: A significant decline in mortgage rates, driven by changes in the bond market, could be a game changer for the housing market. However, for now, there is little indication that rates will fall dramatically in the near future.
Housing Affordability: If wages start to rise, or if home prices decline, affordability may improve, making homeownership a reality for more Americans.
The road to recovery may be long and uncertain, and without significant changes to both the supply side of the market and broader economic conditions, the housing market may continue to face headwinds into 2025. For now, both buyers and sellers need to navigate this difficult landscape with caution, understanding that relief could still be a long way off.