As the rate of inflation cools, we are likely to see the Fed cut interest rates in 2024, 2025 and 2026. This means that the high mortgage rates that we experienced in 2023 will likely go down. In fact, we started to see mortgage rates go down in Q4 of 2023 as banks anticipated lower interest rates coming in the near future. We do not think we will see the sub 3% rates that we saw during the pandemic, but we do anticipate rate declines in 2024 and beyond. A decline in rates has two important impacts on housing: an increase in supply and an increase in demand.

Increase in Supply

Many sellers have been on the sidelines over the past couple of years. They have 3% mortgage rates and were faced with the prospect of selling their house and buying somewhere else with a 7% mortgage rate. Many that did sell were in a position where they can buy their next home in cash and not requiring a 7% mortgage. The majority of people require a mortgage on their house and therefore did not want to leave the comfort of their 3% mortgage.

However, if rates now decline to 5%, you might see more and more people willing to sell as the jump from a 3% rate to a 5% rate is more palatable. Home prices have skyrocketed across the country over the last several years. More people may want to capitalize on high prices and look to sell now that rates have declined. Inventory has been low over the last couple of years and low mortgage rates can help increase supply.

Increase in Demand

Many people have been on the sidelines over the last couple of years, waiting to move or buy their first house until interest rates fall. This will lead to an increase in the demand for houses. In the first couple of years of the pandemic, we saw prices go for above asking and 20 people clamoring to an open house. Last year, we saw very little inventory and the houses that were in good shape continued to see a large level of demand.

Increase in Supply and Demand…What does that mean?

Many are expecting housing prices to come back to earth in the next couple of years. In truth, it’s hard to tell what will happen. Increase in supply means a decrease in prices, but an increase in demand means an increase in prices. Chances are, elevated prices across the country will probably remain elevated. That does not mean we might see price declines in specific areas or that you can’t find a bargain here or there. That will always exist in real estate because no two pieces of property are exactly alike. But as a whole we probably will not see dramatic price declines like some on the sidelines have been hoping for. They’ll be more supply in the new year, but most likely more competition as well.