Outlook: A healthier, stronger housing market depends on mortgage rates

But lower rates will boost competition — and likely prices

Just a couple of comments, a few brief words and a dash of hope have changed the housing outlook in 2024.

The Federal Reserve’s expectations of three rate cuts in the current year was a just-in-time holiday gift for many Californians dreaming of buying a home – and for mortgage and real estate professionals needing more work.

When the first rate cut will happen is uncertain and better-than-expected job numbers could delay the move a few months – or even a quarter. But optimism has returned. 

“What a big couple of days,” said Altos Research president Mike Simonsen after the Fed’s announcement regarding rate cuts in December. “Things may be changing dramatically this spring.”



A rate cut, even a modest quarter or half-point, could help jump-start a sputtering housing market. Mortgage rates have already declined a full percentage point from the latest peak. And consumers are paying attention.

2024 will “be a better year for the California housing market for both buyers and sellers as mortgage interest rates are expected to decline,” says Jennifer Branchini, immediate past president of the California Association of Realtors. “A more favorable market environment with lower borrowing costs, coupled with an increase in available homes for sale, will motivate buyers and sellers to reenter the market.”

BETTER BUT NOT GREAT SALES

CAR economists estimate sales of 327,000 homes in 2024, a 23% increase compared to the 223,000 homes sold in 2023. Both figures are far from the 400,000-plus annual sales before the pandemic.

But it’s a step in the right direction.

“This is our breather year,” says Zillow Chief Economist Skylar Olsen. “I expect the beginning of a long healing process to kick off in the housing market (in 2024.).”

It could be a very long healing process, especially with affordability at a 16-year low, thanks to high mortgage rates and near-record-high home prices coupled with a severe shortage of homes on the market.

CAR estimates about one of every seven (15%) households could afford to buy the median-priced home in California during the third quarter, the lowest rate since the Great Recession. A dip in mortgage rates will help, but not have a huge impact, experts say.

“We’re not going to see a major breakthrough in the logjam” of homeowners sitting on the sidelines waiting for lower rates before moving, says Danielle Hale, chief economist for Realtor.com. “2024 will be a baby step in the right direction. It’s going to stop getting worse.”

California home sales and median home prices

2020202120222023 predicted2024 forecast
Home sales411,900444,500344,000266,200327,100
% change vs. a year ago+3.5%+7.9%-23.1%-22.2%+22.9%
Median price$659,400$786,800$822,300$810,000$860,300
% change vs. a year ago+11.3%+19.3%+4.5%-1.5%+6.2%

Source: California Association of Realtors

MANY HOMEOWNERS WILL LIKELY STAY PUT

Redfin estimates that 89% of homeowners with a mortgage nationwide had a rate of 6% or less in 2023, down from a record 93% in 2022. So, the “locked-in effect” – homeowners reluctant to sell and give up their mortgage rates and smaller monthly payments – will remain a challenge.

“The big question is how many homeowners will see their homes in the next year,” says Todd Teta, chief product and technology officer for ATTOM Data in Irvine. 

The critical crunch of homes listed has kept prices near a record high. The demand, though much less than two years ago, has easily exceeded the supply of homes on the market. CAR estimates prices will increase by 6% to a record $860,000 in 2024.



“Buyers will have more financial flexibility (with the lower rates) to purchase homes at higher prices, which could generate increased housing demand and result in more upward pressure on home prices,” says Jordan Levine, CAR senior vice president and chief economist. He added rates could reach the mid-5% range by the end of the year.

Simonsen adds that consumers are being more comfortable with the higher rates, and are more concerned about volatility.

LOWER RATES WILL ATTRACT MORE BUYERS – AND CREATE MORE COMPETITION FOR HOMES

And the lower rates – while welcome for wanna-be buyers – could create another challenge: more competition for homes.

“There are a lot of buyers on the fence,” says Simonsen of Altos. “When rates fall, the competition will be worse.”

But one thing is certain for buyers, homeowners looking to sell and professionals in the real estate industry.

“Everybody’s ready for the stalemate in housing to be over,” says Hale of Realtor.com. “But the pieces aren’t in place for that to happen just yet.”