While no one can truly predict the future, there’s value to real estate investors in studying forecasted financial data as they prepare to make business decisions over the coming months and years. If you’re eyeing opportunities in 2024, the fluctuations in real estate interest rates, bank policies, and inflation rates loom large as critical factors shaping profitability and investment strategy.

In this post, we’ll dissect financial data related to projected trends in real estate for the upcoming year. Whether you’re a seasoned investor or new to the game, understanding these trends will be key to navigating the opportunities and challenges of the real estate market in the near future.

Economic Indicators

Let’s start with a broad view of the U.S. economy in 2023. Reflecting on the past year, it’s noteworthy that despite a 2.5% expansion in the labor market, there are signs that it’s softening a bit – even after the addition of three million jobs. Consumer spending remains robust, suggesting continued economic confidence among the public. However, a decrease in workforce participation coupled with this spending trend indicates that the overall economy may be beginning to slow.

For the real estate market, these dynamics spell significant implications. The limited inventory of available properties (a 3.2-month supply as of December 2023) has tipped the scales in favor of sellers, creating a competitive environment for buyers. This scenario, along with rising interest rates, is compelling many current homeowners to keep their properties for now, hesitant to venture into a market where they might face higher rates on new mortgages.

Home prices increased consistently over the final six months of 2023, culminating in a median home price of $382,600 in December. This is up 4% from the previous year, another factor that may be keeping would-be homeowners out of the market.

Housing Interest Rates in 2023 and Beyond

Interest rates have been central to shaping the housing market in 2023. The average rate on a 30-year mortgage as of January 2024 stands at 6.84 percent, a stark rise from the low of 3.38 percent back in 2020. This significant increase discourages many potential buyers who find the costs of borrowing prohibitively expensive, which cools demand in an otherwise sizzling market. 

Additionally, for sellers, while the value of their properties may have risen, the prospect of purchasing a new home at these higher interest rates makes the decision to sell less attractive. This dynamic impacts the overall fluidity of the housing market, as both potential buyers and sellers hesitate, leading to a stagnation that contrasts sharply with the frenetic activity seen in previous years.

What’s going to happen with interest rates in 2024? According to Business Insider, mortgage rates should fall a bit this year to somewhere between 5.9 and 6.1 percent. One recommended strategy for eager investors hoping to purchase real estate this year (before home prices potentially increase even more) is to buy now and refinance later when interest rates are lower. However, this strategy may really only be best for those who intend to buy and hold real estate for a long period of time.

Central Bank Policies

Central bank policies have a profound and multifaceted impact on the real estate industry, as shown in the March 2024 Federal Reserve Monetary Policy report. The report illuminates the intricate dynamics at play, particularly noting the declining credit quality of commercial real estate (CRE) loans in sectors such as office, retail, and multifamily buildings. CRE continues to see a decline in demand as people move toward telework and away from traditional office and work spaces. 

Furthermore, CRE prices, especially in the office, retail, and multifamily sectors, continued to fall, suggesting that the lower transaction levels in the office sector might indicate prices have yet to fully adjust to the weakening fundamentals.

In contrast, the single-family residential market displayed resilience, with prices beginning to climb again, though modestly, suggesting a divergent impact of central bank policies across different segments of the real estate market.

Additionally, an uptick in the delinquency rates on bank loans, particularly significant for commercial real estate and consumer loans, highlights another facet of the economic environment shaped by central bank decisions, reflecting broader financial health indicators while reaffirming the enduring challenges faced by the real estate sector in adapting to post-pandemic realities and policy shifts.

Inflation Rates

The Personal Consumption Expenditures (PCE) price index, which the Federal Reserve uses to measure inflation, decreased to 2.7% in 2023 (down from 5.9% the previous year). Experts at the Congressional Budget Office (CBO) predict it will drop slightly to 2.1% in 2024 and then inch up to 2.2% in 2025.

This expected drop in 2024 can mainly be linked to three things. First, pandemic-era supply chain issues are resolving, which should help keep prices of goods from increasing much more. 

Second, with the economy expected to cool down a bit and unemployment to rise slightly, demand for goods and services and the push for higher wages will likely decrease, helping to keep prices stable. 

Lastly, higher long-term interest rates should help control price increases in the real estate market. However, even as inflation cools, mortgage interest rates may remain high, which could deter buyers from purchasing real estate in 2024.

The Bottom Line

What does all of this mean for real estate investing in 2024? Here’s a summary of the key points above to help educate your investment decisions:

• Property prices are increasing steadily.
• Mortgage interest rates are slowly but steadily declining.
• CRE is seeing a decrease in demand.
• The single-family residential market is strong despite limited inventory.
• There is an increase in delinquency on bank loans.
• Inflation will likely drop slightly in 2024.

So, before you invest, review and consider the points mentioned above to determine if you’re truly ready. Good luck!