As the United States leaves 2023 and its rising mortgage interest rates behind, the real estate market continues to experience difficulties as affordability remains a key concern for buyers. Despite the expectation that the Federal Reserve will keep interest rates steady or eventually reduce rates in 2024, the average contract interest rate for 30-year fixed-rate mortgages hasn’t changed from 6.78 percent. 

As a result, and due to continuing affordability issues, applications for home mortgages for purchases have fallen as of the end of January 2024, according to statistics published by CNBC. Week over week, applications fell 11 percent. 

However, applications for home loan refinancing are higher by three percent versus a year previous and higher by two percent versus a week earlier. What do these numbers mean for the industry, and what can the lending and real estate industries expect further into 2024? 

Buyer Demand Drops, Leading to an Overall Decline in Activity 

Despite the modest increase in applications for home loan refinancing, overall activity is down versus the previous week due to the 11 percent reduction in new mortgage applications. Looking at the same time a year ago, applications for new mortgages have fallen a steep 20 percent versus last year. 

In the last few years, low housing supply has kept prices from falling as one would expect during an era of higher and rising interest rates. 

The problem of low housing supply has endured for several reasons, including the significant increase in interest rates and a years-long slowdown in construction activity. Complicating matters is the high rate of retirees and Baby Boomers deciding to remain in their homes rather than downsize and free up large homes for growing Millennial families. 

According to an article published by CNN Business, many homeowners in the older generations aren’t moving because they enjoy their homes. Further, selling in the current market has become difficult since prospective buyers – mostly Millennials with multiple children – can’t afford the large houses they need for their families anyway. 

However, it’s not just the Baby Boomers who have become unwilling or unable to sell their homes. The lethal combination of high interest rates and high prices, fueled by the lack of overall inventory, has encouraged most homeowners to hold off selling their homes, which has created a giant wall for young and first-time homebuyers. 

What Can the Real Estate Industry Expect for the Rest of 2024? 

In a recent interview, the chairman of the Federal Reserve, Jerome Powell, indicated that the Fed expects to cut rates three times over the course of 2024. According to information on the interview shared by Fortune Magazine, industry watchers believe the first cut will occur in May. 

On a positive note, the chairman indicated in his interview that the economy was in no danger of a recession, given the healthy job market and strong economic indicators. The eleven interest rate hikes implemented by the Fed between March 2022 and July 2023 hurt the ability of homebuyers to afford loans, but those moves seemingly helped to reduce the rate of inflation. 

In their first meeting in 2024, the Federal Reserve kept rates steady, targeting a range of 5.25 to 5.5 percent, which is the highest those rates have been in the last two decades. Overall, the Fed will have seven additional meetings throughout 2024 where they may decide to drop interest rates. 

Should the Fed reduce rates, the real estate industry and mortgage lenders should expect a reversal of current trends. Although the significant shortage of available homes will continue to make things difficult for home seekers, lower interest rates may encourage positive movement from sellers and buyers. 

The most important factor in the Fed’s future decision to raise, lower, or keep interest rates steady will most certainly depend on the health of the economy. Should the Fed see any evidence of an increase in inflation, they likely won’t reduce interest rates. 

However, if things turn out in 2024, it’s impossible to predict the future with 100 percent accuracy. It is therefore essential that real estate industry professionals keep an eye on the economy, interest rates, and mortgage data to ensure they can offer the best recommendations on purchases and sales to their clients. 

Have questions?

If you or anyone you know has questions about financing or the current housing market, your expert Los Angeles mortgage brokers at Peak Finance are here to help. Contact us today at [email protected].