In 2023, the economy exhibited tremendous resilience. Though in our estimation the economy appears to be on track for a soft landing, indicators suggest economic headwinds seen last year will persist and continue to affect the housing market, whose performance is inextricably linked to interest rates and supply and demand forces.

Macroeconomic Indicators for 2024

According to the latest estimate for the Bureau of Economic Analysis, the economy expanded at a rate of 2.5% in 2023, up from a 1.9% increase in 2022. The 2.5% increase was well above estimates of the U.S. economy’s long-run potential growth rate, which the Congressional Budget Office estimates to be 1.8% over the decade spanning 2023-2033. In addition, consumer spending remained robust while the labor market remained much stronger than expected. The economy added 3 million jobs in 2023, less than the historical highs seen in 2021 and 2022, but still remarkable given the high interest rate environment. 

In 2024, however, there are some indicators of a labor market that is moderately softening. The unemployment rate increased 0.3 percentage points across the year, though it remains low by historic standards, at 3.7%. 

Last year ended with declining labor force participation rates, job growth rates and total job openings, which leads us to believe we may see job growth moderate to levels more consistent with a balanced labor market. Likewise, while the economy showed resilience last year on the back of strong consumer spending, which we expect will begin to fade as overall economic growth slows. In that scenario, the unemployment rate will see a modest uptick, and inflation will continue to moderate.

If inflation continues to moderate as expected, the Federal Reserve will likely pivot toward cutting interest rates later this year. As a result, we expect mortgage rates to ease modestly throughout the year while remaining in the 6% range. 

What to Expect in the Single-Family Housing Market for 2024

We expect declining interest rates to breathe some life into the single-family housing market, spurring a small recovery in home sales and refinances. However, we expect to continue to face shortages of housing available for sale, as interest rates are not likely to decline enough to break the “rate-lock effect,” caused by homeowners with low-rate mortgages deciding not to buy a new home due to higher-rate mortgages available today. 

This lock-in effect, combined with a slower than expected pace of seniors selling their homes, is limiting the supply of for-sale homes. In fact, the sale of new, previously unoccupied homes increased as a share of overall housing sales in 2023. Through the first three quarters of 2023, new home sales accounted for 14% of all home sales, up from just over 10% in 2018. This is likely to persist in 2024.

Due to a continued lack of inventory, home sales are likely to grow only modestly. The demand for housing will remain high based on a large share of Millennial first-time homebuyers looking to purchase homes. The lack of supply combined with strong demand will push home prices up. We forecast home prices to increase 2.8% in 2024 and 2.0% in 2025 nationally. However, higher monthly costs and down payments required from the increasing property values are pricing many prospective first-time homebuyers out of the market, despite their desire to own a home. 

Under our baseline scenario, we expect increases in both purchase and refinance volumes this year and into 2025. We do not expect purchase origination volumes to reach the levels seen in recent years due to a lack of inventory, but the drop in mortgage rates will push refinance originations up. However, rates remaining in the 6% range will only provide a modest refinance incentive to the population of homeowners who have rates high enough above 6% to consider refinancing. 

What to Expect in the Multifamily Market for 2024

In the multifamily market, home prices and interest rates will continue to price many would-be first-time homebuyers out of the market, keeping them renting longer. 

While the single-family market is facing a national supply deficit, multifamily supply and demand forces are more regionalized. In recent years, construction in the multifamily market has picked up considerably in response to demand. Since 2022, completions are up 24% to 441,000 units annually as of year-end 2023, a level of construction not seen since the late 1980s. There are just under 1 million units currently under construction, many of which are expected to be completed in 2024.

The high rate of new supply will moderate rent increases. We expect modest rent growth in 2024 at 2.5%, below the average from 2000-2022, providing some relief for renters. While these trends are evident at the national level, performance varies regionally. Areas like the Sun Belt and Mountain West regions, with higher levels of new supply, may see greater downward pressure on rent growth.

Although current home prices and interest rates will not necessarily create long-term demand for renting, these factors will help keep occupancy stable as more supply enters the market. Though it will vary by region, we forecast the national vacancy rate to be 5.7%, slightly higher than the average from 2000-2022.

Our forecast calls for positive transaction volumes and rent growth in 2024. As the 10-year Treasury rate stabilizes, more transactions will be brought to the market, although downward pressure remains on property valuations given the higher-for-longer interest rate environment. Our forecast calls for increasing origination volume in 2024, up from 2023’s projected $271 billion to the $370 billion to $380 billion range in 2024. This is below 2021 and 2022 volumes but in line with 2019. Several headwinds remain that will affect the multifamily market in 2024 resulting in positive but below average performance.

All told, if our forecasts are met, the housing and multifamily markets are expected to experience moderate growth in 2024. What’s more, though headwinds will continue, current conditions and projections indicate the economy will remain resilient in the year ahead. 

©2024 by Freddie Mac.