The U.S. economy survived 2023 without going into a recession, as consumers turned out to be more resilient than most economists expected. Despite going through high inflation, banking crisis, and rounds of layoffs by some of the high-profile companies in the past year, consumers remained upbeat and their confidence recovered somewhat at the end of 2023. The housing market, on the other hand, had a rough year as mortgage rates remained elevated and supply continued to be tight.
The Fed is expected to cut its policy rate this year but has also indicated that they may not pull the trigger until they see more signs of easing in inflation. The uncertainty of future rate cuts could increase interest rate volatility in the next couple of months, but the average 30-year fixed rate mortgage should slowly decline back to 6.5% by mid-year. Mortgage rates will continue to trend down in the second half of 2024 and could reach 6% by the end of the year.
With interest rates expected to decline gradually in the next 12 months, the lock-in effect will begin to ease, and more properties will be released onto the market. More newly built housing units will also be available as developers continue to rev up new constructions to address the persistent housing shortage issue. While supply in 2024 will remain below the norm by historical standards, active listings could increase between 10% to 20% as market conditions and lending environment continue to improve.
Lower costs of borrowing and an increase in housing supply are factors that could motivate buyers and sellers to reenter the market in the upcoming home buying season. First-time buyers who were priced out or got squeezed out by market competition last year will give it another shot to attain their American dream. Repeat buyers who have overcome the lock-in effect will also return to the market as rates slowly trend down. Sales will have a soft growth in Q1 2024, but momentum should pick up later this year as rates decline further. California home sales will bounce back with a double-digits gain in 2024 after declining more than 20% in 2023.
Lower interest rates and tight housing supply will also put upward pressure on home prices in the coming year. While more sellers will be listing their properties on the market, demand will also rise as affordability improves, resulting in market competition remaining intense. Meanwhile, with rates expected to dip in the next 12 months, buyers will have more financial flexibility to purchase homes at higher prices. Assuming a healthy economy with either no recession or a mild recession in 2024, home prices should rise modestly
across California, with the state’s median price growing 5.7% year-over-year and reaching a new high after falling 0.6% in 2023.
