Economic, Housing and Mortgage Market Outlook – December 2023

In this issue

• Bolstered by resilient consumer spending and investment, the U.S. economy expanded in 2023, defying expectations of a recession. MORE
• Home sales remain in the doldrums, reflected in historically low pending home sales. MORE
• Mortgage rates have been on the decline after hitting two-decade highs in October, providing some relief to potential homebuyers. MORE

Recent developments

U.S. economy: The U.S. economy continued to outperform expectations with economic growth reaching a seasonally adjusted annualized rate of 5.2%¹ in Q3 2023, the fastest growth rate since Q4 2021. Excluding the volatile COVID years of 2020 and 2021, last quarter’s growth was the fourth fastest growth rate during the last two decades. The two largest drivers of economic growth in Q3 were consumption and investment. Consumption added 2.4 percentage points and investment added 1.8 percentage points of growth during Q3, and these growth rates were nearly twice their typical contributions in the five years prior to the 2020 recession.

The labor market continued to grow at a rapid rate, especially when considering that the unemployment rate was very low by historical standards. Payroll growth for November was 199,000 and for the full year-to-date, employment growth averaged 232,000.² The growth in employment during 2023 is a considerable feat given that the unemployment rate was at a five-decade low in 2023. For a comparison, the unemployment rate in 2019 was almost as low as 2023, but during 2019 the labor market only generated an average of 163,000 jobs per month, which is 70,000 less per month than in 2023—a substantial difference.

What’s even more remarkable is that despite the very low unemployment rate and strong labor and economic growth, inflation continued to trend lower. The Core Personal Consumption Expenditures (PCE) price index rose 3.5% year-over-year as of October 2023.³ This was the smallest twelve month increase since April 2021 in the Core PCE price index.

U.S. housing market: Despite the strong economic growth, total home sales declined every month since July 2021 and were down 11% year-over-year in October 2023. Existing home sales fell 4% over the month and 15% over the year in October to a seasonally adjusted annual rate of 3.8 million units,⁴ the lowest level since summer of 2010. Pending home sales fell 1.5% in October 2023 to a historic low index level of 71.4. While new home sales fell 6% to 679,000 units in October,⁵ they were 18% above levels seen a year ago.

U.S. mortgage market: The average rate of a 30-year fixed-rate mortgage, as measured by Freddie Mac’s Primary Mortgage Market Survey^®, fell almost 0.8 percentage points from the last week in October through the first week in December. This decrease in rates is breathing some life back into the housing market with some potential homebuyers taking action that is reflected in home purchase applications, which increased 15% between mid-October and early December.⁶ However, demand is currently very sensitive to changes in mortgage rates and rates would need to fall further in order for purchase demand to continue to recover.

Outlook

We expect economic growth to modestly slow from the above 2023 trend growth to the longer-term trend in 2024. The pace of growth of consumption spending may decrease from the levels we saw this year and we expect hiring to cool off, leading to a modest uptick in unemployment. The slowing economy will also lead to further moderation in inflation. However, inflation will remain above the Federal Reserve’s target of 2%. But the progress on inflation will allow the Federal Reserve to continue to pause or start to cut rates.

In this environment, mortgage rates are expected to gradually ease throughout the year but remain in the 6% to 7% range. While lower rates will help alleviate affordability issues, they will not be low enough to pull substantial inventory of existing homes into the market. Thus, the home sales market in 2024 will look similar to 2023, characterized by low transaction volume and a severe lack of inventory. Additionally, the weaker economy and slower labor market will reduce demand. However, due to the still tight supply of for sale inventory, we forecast house prices to increase 6.3% in 2023 and 2.7% in 2024 nationally.

The low level of home sales will keep purchase mortgage origination volume down in the number of transactions, but the increase in house prices will drive a modest increase in the dollar volume of purchase originations. The decline in mortgage rates will not be large enough to push many mortgage borrowers into a refinance, so refinance origination volume will remain low in 2024. The market should be significantly better for both purchase and refinance activity in 2025.

Prepared by the Economic & Housing Research group

Sam Khater, Chief Economist  
Len Kiefer, Deputy Chief Economist  
Ajita Atreya, Macro & Housing Economics Manager  
Rama Yanamandra, Macro & Housing Economics Manager  
Penka Trentcheva, Macro & Housing Economics Senior  
Genaro Villa, Macro & Housing Economics Senior 
Lalith Manukonda, Finance Analyst

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