In 2024, we're expecting a mild thaw in the housing market coupled with ongoing shifts in home purchasing behavior across generations.
We anticipate 30-year mortgage rates will fall in 2024 as the Federal Reserve begins to lower its policy rate, and we anticipate the 30-year mortgage rate to likely fall and potentially move below 6.00%. This should help incentivize current homeowners to put their properties on the market without worrying about the cost to borrow against a new purchase, thereby increasing existing home transactions.
However, we also anticipate home prices to rise and offset some of the benefits from lower interest rates on buyers' monthly mortgage payments. This could be challenging for younger buyers. Americans 55 and older will likely continue to drive purchases in the housing market as they utilize their wealth to relocate without necessary downsizing. This cultural phenomenon is essential to understanding shifts in housing market purchases in the coming year. This is also expected to steer a generational divide in home ownership patterns.
Impacts of Mortgage Rates
Not everyone is feeling the effects of higher mortgage rates equally.
After falling to a record low of 2.65% in January 2021, the 30-year mortgage rate increased to a multi-year high of 7.79% less than two years later in November 2023, per data from Freddie Mac. This sudden rise occurred as the Federal Reserve increased interest rates due to inflation.
The U.S. is unique in offering a 30-year fixed rate product to finance home purchases, allowing homeowners to lock in an interest rate for 30 years regardless of changes to a home's value or the broader interest rate environment. However, the loan is tied to a property. If a homeowner sells a home to buy a new one, they must pay off the existing loan and take on a new mortgage at a new interest (or mortgage) rate; the loan cannot be transferred. The new interest rate could be lower, the same or higher than the mortgage they just closed out.
The vast majority of current U.S. mortgage holders initiated their loans between 2010 and 2021, when interest rates were low. As a result, the average interest rate across homeowners in the U.S. is currently 4.10%, with more than 85% of mortgage holders paying less than 5.00%, according to data from the Federal Housing Finance Agency. That’s significantly lower than the current market rate, which is around 7.00%.
For existing homeowners with fixed-rate mortgages and no plans to move, the rise in interest rates did not affect their monthly payments. But the spike in rates upended many would-be buyers.
The Sudden Upswing in Mortgage Rates Is Causing Supply Distortions Due to the Mortgage Rate Lock-in Effect
Given the dichotomy between the average mortgage rate paid across the U.S. and the prevailing market rate for a 30-year mortgage, if a homeowner sells their current home, buys a new home, and takes on a mortgage at current market rates, it would increase their monthly interest expense by $800 per month over 30 years. To keep their monthly mortgage payment flat, they would need to downsize by the equivalent of an entire bedroom and bathroom. To achieve a lower monthly payment, they would need to shed two bedrooms.
While downsizing has historically been common in certain age groups, at some point the tradeoff doesn't make sense. Why shift to a significantly smaller home if the monthly mortgage barely changes? And why pay a higher mortgage for a similarly sized home? This phenomenon, known as the mortgage rate lock-in effect, has led to fewer homeowners listing their properties, which has restricted the supply of houses on the market.
In response, home sales fell sharply in 2022 and 2023. For context, sales of existing homes usually dwarf sales of new-construction homes: Based on data from the US Census Bureau, in January 2021, the U.S. was on pace to sell 6.56 million existing homes for the year compared with 901,000 new homes; an existing-to-new home ratio of 7.3 to 1. At the time, the 30-year mortgage rate was 2.73%.
But by October 2023, the U.S. was on track to sell just 3.79 million existing homes and 679,000 new homes, for an existing-to-new home ratio of 5.6 to 1. By then, the 30-year mortgage rate was 7.63%. In total, sales of new homes dropped by almost 25% while existing transactions fell by over 40%.
Despite high rates, housing demand stayed relatively robust, which kept home prices elevated. In 2023, the median price reached $388,000 – the highest on record – according to the National Association of Realtors (NAR). Even after buyers put 20 percent down, monthly payments for a typical home exceeded 27% of income for the average household in late 2023, substantially above the 15% to 18% that was common before the pandemic. This created challenges for first-time homebuyers, preventing some from qualifying for loans and buying houses.
This is a very unique environment; the U.S. has almost never experienced such a dramatic surge in mortgage rates. We would need to go back to the 1970s to see a similar trend, and even that does not compare to the current gyrations.
But high interest rates and lower affordability have not impacted all households equally. There is a clear division between older homeowners and younger buyers.
Generational Differences in Home Purchasing
The 55+ age group is driving most of the home sales.
In 2022, homeowners older than 55 had an average of $475,000 in real estate equity, according to data from the U.S. Census Bureau and the Federal Reserve Board. This average is above the nationwide median home price.
The U.S. Census Bureau also reports that 54.3% of homeowners ages 55 and older own their homes outright after years of paying off mortgages and sitting on assets that increased in value. To further highlight the point, in the last four years, homeowners under age 55 gained $3.4 trillion in equity, while those above 55 gained $9.1 trillion!
Thanks to that equity, many older buyers are buying homes in cash. A recent NAR survey indicates that 41% of homebuyers above the age of 55 purchased their home for all cash and no loan in 2022, compared to just 10% of those under 55. For this cohort, the ability to buy a home in cash diminishes the mortgage rate lock-in effect since there are no monthly payments to worry about.
These factors have given an edge to older homeowners. Individuals 55 and older accounted for 63% of all home sales in 2022, according to NAR data, up from 55% before the pandemic. High levels of housing equity gave them more flexibility, while the mortgage lock-in effect prevented younger buyers from moving.
Older Buyers Are Moving Further Away Instead of Downsizing
Traditionally, Americans have downsized to smaller properties after turning 55. Their children have often moved out, diminishing the need for extra space, and they have typically prioritized cheaper homes while using the profits to supplement their retirement incomes.
However, in a surprising development, older homeowners stopped downsizing after the pandemic. According to NAR, the 55+ group purchased homes that were an average of 4.4 square feet larger than the units they sold. The most common reason was a “desire to be closer to family/friends/relatives,” which likely means children and grandchildren. They also moved farther distances, relocating by approximately 75.1 miles compared to just 25.4 miles immediately before the pandemic.
Thus, not only is the 55-and-over group responsible for a large share of purchases, but they are also moving further and buying slightly larger homes. This could mark the beginning of a new cultural phenomenon as older Americans change their home buying behaviors.
A Slow Thaw May Continue To Keep Younger Buyers Out of the Market
In 2024, the Federal Reserve is expected to reduce the Federal Funds Rate, which would lead to lower mortgage rates for prospective homebuyers. After peaking at 7.80% last fall, the 30-year fixed mortgage could move below 6.00% by the end of 2024, making it somewhat more feasible for some homeowners to move.
Lower rates will lead to improved housing affordability, bringing some first-time buyers back into the market. Combined, lower rates and greater affordability should support more home sales in 2024 by a fairly small margin, with sales increasing by 1% to 3%.
In order to witness a sharp acceleration in transactions, mortgage rates need to fall below 4.1%, which is the average rate paid by existing homeowners. This scenario is unlikely anytime soon. Consequently, the mortgage rate lock-in effect may continue to keep some existing homeowners from putting their properties on the market.
Due to limited supply, we anticipate home price appreciation will likely continue in the coming year and could be around 5%. The rise in prices will offset the fall in mortgage rates, and therefore the average monthly payments on purchased homes may only fall by as little as $50 to $250 in the coming year.
These trends could further constrain younger buyers from entering the home market, while relatively wealthier 55-and-over Americans continue to buy a larger share of the limited existing home supply.
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