U.S. home prices surged to record levels in October as the S&P CoreLogic Case-Shiller home price index rose by 4.8% year over year. Mortgage rates have slipped lately amid speculation regarding Federal Reserve rate cuts. 

As of Dec. 28, the average interest rate for a 30-year fixed-rate mortgage stood at 6.61%, reflecting a decline from the previous week’s 6.67%, according to data from Freddie Mac. Since reaching its highest point in 22 years in late October, the rate has consistently dropped each week, falling by 1.18% during this period.

Slumping Inflation

Inflation has been slumping across all major sectors, bringing relief to consumers and businesses nationwide. Consumer prices increased by 3.1% year over year in November, driven by reduced prices in durable goods such as used cars, furniture and electronics over the past year. This has instilled optimism that inflation metrics could align with the Federal Reserve’s 2% target by early 2024.

The primary obstacle hindering this progress is shelter, which saw a 6.5% rise in the year leading up to November. Given its substantial 35% contribution to the consumer price index (CPI), shelter’s influence is disproportionately significant. Excluding shelter, the inflation rate for that period would have been 1.4%.

Shelter inflation is determined by rental rates rather than housing prices. According to Zillow, the rate of rent growth has decreased to 3.3% through November in the past year, which is lower than the average observed during the prepandemic years in 2018-19.

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Uptick In Housing Activity 

"After picking up somewhat over the summer, activity in the housing sector has flattened out and remains well below the levels of a year ago, largely reflecting higher mortgage rates," Federal Reserve Chairman Jerome Powell said during a Federal Open Market Committee meeting. 

As the Fed begins executing rate cuts this year, housing market activity is expected to pick up. Homebuilder activity is predicted to rise as borrowing costs decline, while the lower mortgage rates are expected to attract homebuyers across the country. While annual median home prices are expected to remain the same in fiscal 2024, rapid wage growth should improve affordability this year. 

The average 30-year fixed mortgage rate will hover near 6.3% in 2024, according to Lawrence Yun, the chief economist at the National Association of Realtors (NAR). He also predicts that the Federal Reserve will implement four rate cuts, aiming to alleviate inflationary pressures arising from a deceleration in economic activity.

With increased inventory and slightly reduced mortgage rates providing buyers with more flexibility, NAR predicts a surge in existing home sales. According to Yun’s forecast, approximately 4.71 million existing homes are expected to be sold in 2024, marking a 13.5% rise from the projected 4.1 million units sold this year. Rent prices are also expected to slump in fiscal 2024, which should further weigh down the consumer price index. 

Yun also envisions sustained growth in new home construction, contributing to the overall housing supply. He anticipates a total of 1.48 million housing starts in 2024, comprising 1.04 million single-family homes and 440,000 multifamily units. 

“Metro markets in southern states will likely outperform others due to faster job increases, while markets in the Midwest will experience gains from being in the most affordable region," Yun said in a statement. “In addition, housing inventory is expected to rise by around 30% as more sellers begin to list after delaying selling over the past two years. The selected top 10 U.S. markets will experience faster recovery in home sales.”

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