5 Ways Inflation Could Affect the 2024 Housing Market

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Homeowners across the nation have felt the financial pressure of inflation. Rising mortgage rates have caused a slowdown in U.S. housing market activity, leading numerous buyers to postpone purchases; nevertheless, home values persist, showing resilience amid this trend.

According to a recent Goldman Sachs report, their market analysts estimate that home prices have gone up 4.2% so far this year but will dip slightly to wrap up the year with a +3.4% year-over-year increase. This will be followed by a more moderate rise of 1.3% projected for 2024.

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Before you make any move, it’s important to examine the current housing market and listen to what the experts are saying about inflation’s impact on homes. This is an in-depth look at how inflation is affecting the housing market, and what it means for you.

Anticipated decline in 2024 inflation: What to expect

Goldman Sachs foresees the global economy surpassing expectations in 2024, driven by strong income growth and confidence that the most significant interest rate hikes are in the past. The investment bank projects the worldwide GDP to expand 2.6% next year on an annual average basis.

The U.S. is anticipated to outperform other developed markets, with an estimated growth of 2.1%. Moreover, Goldman suggests that the impact of monetary and fiscal tightening policies has largely eased.

The investment experts at Morningstar are predicting a decline in inflation, which peaked in 2022, expecting it to diminish by the end of 2023 and into 2024. Their latest Economic Outlook attributes this to resolving supply chain issues and a moderated economic pace due to the Federal Reserve’s measures. They predict inflation to average 1.8% from 2024 to 2027, below the Fed’s 2% target. If inflation persists, Morningstar says the Fed stands ready to induce a recession to align it with the 2% target.

According to U.S. Labor Department data published on November 14, 2023, the annual inflation rate for the United States was recorded at 3.2% for the 12 months ended October, down from the previous rate of 3.7%, as highlighted by Coin News’ U.S. Inflation Calculator.

5 ways inflation can affect the housing market

As inflation weighs heavy on both home buyers’ and sellers’ minds, the housing market has shifted. Here are five ways inflation can affect the housing market:

1. Home prices could go down

With living costs skyrocketing, it’s natural to think housing prices will keep climbing. However, housing prices smashed records earlier this year – with the median price of existing homes ballooning to $394,300 in September. As buyers see inflation eating into their wallets, they have started backing away from home sales. At the same time, mortgage rates have gone up. Both of these factors could further dampen housing demand and eventually deflate prices.

Kurt Beuhler, a HomeLight Elite agent with 37 years of experience selling in the Dallas-Fort Worth area, says: “You know it was stupid. It got to the point where, on a $400,000 house, we would see $50,000 to $75,000 over list price on offers. And that was setting benchmarks up there where the price is so high, the affordability indexed it, and buyers couldn’t afford to even purchase at that price point.”

2. Home values may waver

Between the second quarter of 2022 and the second quarter of 2023, house prices generally increased across the majority of U.S. states. Nonetheless, eight states and the District of Columbia witnessed price declines. The annual appreciation rate for single-family housing in the U.S. reached 3% while Maine and Connecticut, with the highest appreciation rates, neared 8%.

However, as high inflation costs press down on buyers, it could depress home values. Although he doesn’t expect a major housing market crash, Buehler says he sees home values flattening out as inflation nestles into the housing market.

“We’re almost on the edge of a neutral marketplace, rather than a seller’s marketplace,” he explains. “So, yeah, there are going to be some declining prices.”

3. Mortgage rates could start to drop

In the current economy, mortgage interest rates jumped more than 50% in response to the 2022-2023 Fed rate hikes, and currently are dancing between 7%-8%. The Federal Reserve’s benchmark rate is anticipated to slightly decrease by the end of 2024, aligning with both policymakers’ and markets’ current expectations.

Although the Feds might raise rates once more in 2023, market experts predict a more significant decline of around 1% in the Fed funds rate to range between 4% and 5% by the year’s end. However, any rate cuts are likely to occur predominantly in the latter half of 2024, possibly starting from June onwards, differing notably from the rapid rate increases observed in previous years.

While low interest rates can be advantageous for home financing, their impact varies based on the mortgage type — be it a fixed-rate mortgage, maintaining a constant interest rate throughout the loan, or an adjustable-rate mortgage, where the interest rate fluctuates.

Even if rates simmer down, it’s likely that they won’t drop back to pre-inflation levels.

4. Construction costs may rise

When inflation is high, the costs of materials also increase. That means it may become especially expensive for construction teams to build new homes or renovate existing homes. Ultimately, those high costs could spill into the housing market and lift home prices for new builds.

“When inflation affects the marketplace, it also affects all the costs of goods to build a house,” points out Buehler. “So we may see builders holding higher prices because it’s costing them more to build a house.”

5. Housing sales could continue to slow down

During the hot seller’s market of 2021, home sales raced to the highest numbers since 2006. Now, as interest rates soar and inflation burns into consumers’ savings, it has caused many home shoppers to think twice about buying a home. It’s clear that inflation plays a role in slowing down the real estate market.

“We had been in a seller’s market for the last 10 years,” says Buehler. “We’re going to cycle into a more neutral marketplace, and I’m sure in some marketplaces, it’s going to be a buyer’s market.”

What if I want to sell my home during inflation?

With inflation beating down on the housing market, you’re probably wondering if you should sell your home now or wait until the economy flattens out. Here are a few tips if you’re thinking about selling your home during the current spike in inflation:

  • Assess your selling motives: Before leaping into an uncertain market, Buehler suggests sellers think about their lifestyles and decide if they’re ready to sell right away. He says to ask, “What do they want out of the sale of the house? And why are they selling?” If you realize you’re serious about selling after doing a little soul-searching, he says you should start conducting research now and connect with a real estate agent to discuss your home’s value.
  • Sell soon to cash in: Because housing prices may shrink in the near future, if you’re looking fo a high return, you may want to pull the trigger on a sale soon to cash in on high prices. Buehler explains, “When interest rates go up, buyers have to reduce what they buy a home for in order to have that same payment…We still have an opportunity for sellers to obtain the high prices.”
  • Do your research first: Even though inflation is impacting the entire market, it may affect some regional housing markets more than others. That’s why it’s a good idea for you to dig into your individual housing market’s specifics before you sell your home. One way to do this is to find a real estate agent to conduct a comparative market analysis for your home. This is a research tool agents use to examine a property’s characteristics — as well as nearby sales — and set a competitive price for your house.
  • Update your home: As the housing market tightens, it could become more and more important to prep your home before a sale. That may include making renovations, identifying which fixes will land you the highest ROI, and staging properly. Buehler says: “The homes that are not updated are the ones that are sitting and doing price reductions. If they’re not updated, and they’re not pretty, they’re not getting hit at all. Buyers are not just buying anything that comes on the market anymore.”

What if I want to buy a home during inflation?

As a buyer, it may feel like inflation is pulling you in a hundred different directions at once. Inflation can dampen housing demand and cool down prices. At the same time, you’re probably feeling the pain of high living costs and rising mortgage rates. If you’re thinking about buying a home amidst inflation, here are a few tips:

  • Keep an eye out for new opportunities: If inflation limits demand, buyers may see competition within the housing market lighten up. That means it could be your chance to buy at prices you couldn’t before. Buehler says he’s seeing buyers who were once shut out of the market starting to re-enter as demand calms down.
  • Consider all costs: It’s important to remember that inflation doesn’t just impact a home’s final sale price. It can also hike up everyday living costs, closing costs, down payments, and all of the other expenses that are built into a sale. That’s why it’s important to look into all of the costs of buying a home and to budget before jumping into a deal.
  • Find an agent who’s a financing wizard: In the face of higher interest rates, buyers may be able to find payment options that ease up the buying process. For instance, it may be worth looking into adjustable-rate mortgages (ARMs), bridge loans, or Buy Before You Sell programs.

Buehler says top real estate agents can work closely with financing companies to help lift pressure off of buyers. “When people are concerned about payments, there are ways to help them with those payments,” he explains. “[For agents] that’s figuring out, and being very good at, the finances.”

Overall, if you’re worried about financing, it’s worth asking your buyer’s agent or a loan officer about all of your options.

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Inflation is morphing opportunities in the housing market

Inflation is changing the face of the market. As financial pressure increases, it can impact everything from prices and home values to home sales, construction costs, and more.

No matter how inflation affects the housing market, it will shuffle choices and opportunities for buyers and sellers. The easiest way to spot the best opportunities for your home transaction is to connect with an agent who understands the ins and outs of your local housing market.

Want to get started? HomeLight’s free Agent Match platform can connect you with a top-performing real estate agent in your area.

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