Sales of previously occupied homes in the U.S. plunged to their lowest levels in decades in 2023. In December 2023, existing home sales slipped by 1.0% to a seasonally adjusted annual rate of 3.78 million units, the lowest since August 2010, per Reuters, as quoted on Yahoo Finance. A lack of inventory coupled with moderately higher mortgage rates continued to propel home prices upward, despite a slight increase in new listings.
Can Things Turn Around?
The average rate for a 30-year mortgage declined slightly to 6.63%, according to Freddie Mac. This reduction, the second in 2024, is expected to continue as inflation shows signs of moderation. Orphe Divounguy of Zillow predicts that if core inflation and economic activity continue to stabilize, mortgage rates may not rise further, resulting in a modest rebound in the housing market this spring, per an article published on Yahoo Finance.
Impact of Interest Rates on Housing Market
Interest rates are a crucial factor in the housing market. The recent decline in rates could lead to a busier spring buying season – an important period for home sales. However, a recent uptick in rates led to a 7.2% decrease in mortgage applications, as per the Mortgage Bankers Association (MBA). This sensitivity to rate changes highlights the challenges in the current market, which is already worsened by low housing supply and high home prices.
The Fed has maintained its benchmark rate in late January to control inflation but remains optimistic about the possibility of rate cuts, possibly over the medium term. The latest Personal Consumption Expenditures (PCE) index showed a 2.6% annual increase, indicating a potential easing of inflationary pressures.
Experts from Wells Fargo and Fannie Mae expect a decline in mortgage rates, possibly below 6% by the end of 2024, as mentioned in the above-said Yahoo Finance article. This expectation aligns with the general anticipation of a cut in Federal Reserve rates by early 2025, which could further stimulate the housing market.
Still-Solid Homebuyer Interest & Rising Availability
Despite lower application rates, buyer interest remains. Redfin's Homebuyer Demand Index showed a 6% increase in buyer requests. Notably, there were 1.0 million previously owned homes on the market in December, up 4.2% from a year ago, though below the pre-Covid level of nearly 2 million units.
At December's sales pace, it would take 3.2 months to finish the current inventory of existing homes, up from 2.9 months a year ago. A four-to-seven-month supply is viewed as a healthy balance between supply and demand.
ETFs in Focus
Although the situation is mixed, there is a hope for a housing market revival in the near term. This puts focus on homebuilding ETFs like iShares U.S. Home Construction ETF ITB, SPDR S&P Homebuilders ETF XHB, Invesco Building & Construction ETF PKB, and Hoya Capital Housing ETF HOMZ.
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