Soft landing forecasted for 2024, real estate sales to remain muted
The overall economy is expected to fare well in 2024 according to economists from across the spectrum. However, real estate sales will likely remain muted through much of the year due to low inventory and elevated interest rates.
An anticipated recession failed to materialize in 2023, and now the economy is predicted to experience a soft landing in Q1 2024. Goldman Sachs is especially optimistic, projecting U.S. GDP growth to hit 2.1% in 2024 compared to other economists who see growth in the 1-1.8% range for the year.
“It was fair to wonder last year whether labor market overheating and an at times unsettling high inflation mindset could be reversed painlessly,” said David Mericle, Goldman Sachs Research chief US economist, in a recent economic report. “But these problems now look largely solved, the conditions for inflation to return to target are in place, and the heaviest blows from monetary and fiscal tightening are well behind us.”
Joe Brusuelas, chief economist for RSM, a global network of independent assurance, tax and consulting firms, also sees a slow first quarter, followed by an uptick to 1.8% in the second half of 2024 and possibly accelerating into 2025.
“We expect that policy tailwinds from both the fiscal and monetary authorities will set the stage for strong productivity and growth in the years ahead as inflation eases back to a much more tolerable range,” Brusuelas said in his 2024 outlook report in the December edition of The Real Economy.
While all indications point to economic fundamentals being strong enough to keep the overall U.S. economy on stable ground in 2024, consumer confidence and real estate sales are likely to remain at a low ebb next year.
Consumer confidence
Looking at the economy through a consumer lens, The Conference Board is a bit more pessimistic, noting in its November forecast that the economy is likely to buckle early in the year, leading to a short and shallow recession.
“This outlook is associated with numerous factors, including elevated inflation, high interest rates, dissipating pandemic savings, rising consumer debt, and the resumption of mandatory student loan repayments,” they noted. “We forecast that real GDP will grow by 2.4% in 2023, and then fall to 0.8% in 2024.”
On the upside, consumer confidence was up 2.9% in November after three months of decline. The Conference Board Measure of CEO Confidence, however, fell to 46 in Q4 2023, down from 48 in the third quarter, as most business leaders are also anticipating a mild recession in early 2024.
Interest rates freeze real estate sales
With interest rates hovering in the 7.5-8% range as we bid goodbye to 2023, prospective homebuyers will continue to face a double conundrum in 2024:
- High interest rates have put many more available properties in the unaffordable range.
- Fewer homes are coming on the market as homeowners with low rates are staying put.
Some relief is on the horizon as homebuilders remain cautiously in the market to fill the supply gap. Many regions of the country are reporting strong new home sales, as homebuyers ready and willing to invest drift away from the paltry supply of existing homes to the new home market.
Freddie Mac statistics support this idea, with the GSE reporting that existing home sales were at their lowest level in 13 years in the month of September, but new home sales were showing remarkable resilience.
“New home sales have taken on increased importance for the housing market as the share of total home sales that are new increased to 16.1%, the highest share since 2005,” Freddie Mac reported. “The U.S. Census Bureau and U.S. Department of Housing and Urban Development reported that new home sales in September 2023 were at an annualized rate of 759,000, up 12.3% from August and 33.9% from September 2022. Overall, the inventory of new homes for sale has decreased 5.4% from last year.”
Fannie Mae sees existing home sales declining in the near term but surging again as 2024 progresses.
“Regardless of whether the economy manages a soft landing or enters a mild recession, the ESR Group forecasts mortgage rates in 2024 to retreat from their recent highs and average 6.8% by the fourth quarter,” Fannie Mae said in its November assessment. “As such, the ESR group expects home sales to begin to increase modestly over 2024 but to remain constrained by the likely persistence of the low supply of homes for sale.”
Navigating the market
Interest rates, while high, are not in uncharted territory and homebuyers in the past have learned how to navigate higher interest rates through a plethora of tactics.
Real estate agents and loan officers who are knowledgeable and consultative with their customers may help keep the market afloat in 2024 by assisting their prospective homebuyers with a range of options, such as:
- Backpedaling expectations towards more affordable homes.
- Encouraging buyers to increase downpayments to lower their monthly payments.
- Educating borrowers about alternative products such as adjustable-rate mortgages.
- Negotiating seller concessions.
- Working with homebuilders to moderate costs in new home construction.
Of course, none of these concessions makes up for lack of supply. Luring home sellers who are locked into mortgages in the 3-4% range back into the market is going to continue to be a challenge until overall rates begin to moderate, which by all predictions is unlikely to happen until the latter half of 2024.
Keeping an eye on fundamentals
As we enter 2024, it will be imperative for business owners to keep their eye on economic fundamentals both nationally and in their own market as they navigate a slower real estate market.
Job market
Although the job market has slowed in recent months, the outlook remains strong for stable employment in 2024, with some anticipation of a modest increase in unemployment. Regional variations are likely to have some impact on the real estate outlook in specific markets.
Consumer spending
According to Goldman Sachs, real disposable income is forecast to grow nearly 3% in 2024. Solid job growth, real wage growth and an increase in interest income should keep consumer spending strong.
Business investment
Higher interest rates are likely to take a toll on business investment, but if recessionary fears continue to abate, this may become a non-issue in 2024.
U.S. imports/exports
U.S. imports, which reached a zenith during the pandemic, have eased back in the past year. According to Goldman Sachs research, U.S. exports are expected to show some improvement in the coming year, as foreign economic growth accelerates, narrowing the trade deficit.
If interest rates begin to moderate in the latter part of 2024, real estate sales could improve under the strength of a wave of Millennials who are eager to move up to home ownership.
However, the specter of even a mild recession coupled with diminished consumer savings so necessary for a downpayment, growing credit card debt, lack of affordable housing, and high interest rates could delay a real estate market comeback well into 2025, especially for first-time homebuyers.
