The residential real estate market tumbled in 2023, as soaring interest rates steadily slowed sales activity — but home prices still hit a record high.
The median home sale price in 2023 was $389,800, up about 1% from 2022 and the highest on record, according to data from the National Association of Realtors released Friday.
That is good news for the 85 million homeowning households that enjoyed further gains in housing wealth, said Lawrence Yun, chief economist at NAR. However, it proved to be a maddening market for new homebuyers, who were priced out by rising prices and, for much of the year, surging mortgage rates that made this the least affordable market in decades.
As a result of high prices and low inventory, home sales dropped to their lowest level since 1995, with 4.09 million homes sold, down 19% from the year before. This follows an 18% drop in home sales from 2021 to 2022.
“Obviously, the recent, rapid three-year rise in home prices is unsustainable,” said Yun. “Creating a path towards homeownership for today’s renters is essential. It requires economic and income growth and, most importantly, a steady buildup of home construction.
The latest month’s sales look to be the bottom before inevitably turning higher in the new year, added Yun.
“Mortgage rates are meaningfully lower compared to just two months ago, and more inventory is expected to appear on the market in upcoming months.”
Annual sales have fallen the past two years
December is expected to be the low point for sales of this cycle, and Yun said economists expect more homes to be sold in 2024 as mortgage rates come down.
The last time home sales were this low, in 1995, sales were on the upswing. The median home price that year was $114,600 and there were 3.8 million homes sold before crossing over 4 million the following year. Mortgage rates dropped in 1995, from 9% to 7%.
The typical annual pace of home sales in the five years prior to the pandemic was 5.5 million, according to Yun. Since the pandemic, annual sales numbers have been much more volatile.
Even with all the disruptions of the onset of the pandemic, sales in 2020 ended at about 5.5 million. The next year, sales soared to over 6 million amid the frenzied market as mortgage rates sank in 2021. Then, sales dropped to 5 million in 2022 as the Federal Reserve began its historic campaign to rein in inflation, pushing mortgage rates higher. As mortgage rates hit 7.79% in October 2023, the highest in 23 years, sales sank again, to about 4 million.
But high mortgage rates aren’t entirely to blame for the deficit in transactions last year, said Lisa Sturtevant, chief economist at Bright Multiple Listing Service, in a statement Friday.
“The demand for housing — and homeownership, in particular — has remained high, despite higher rates,” she said. “Prospective homebuyers have been shut out of the market by a lack of inventory. If there had been more listings on the market in 2023, we would have had more home sales.”
New home construction slowed at the end of 2023
The annual pace of new home construction pulled back last month after soaring in November, despite a historic shortage of housing inventory and falling mortgage rates.
Housing starts came down by 4.3% in December compared to the previous month, according to data released Thursday by the Census Bureau.
Starts fell to a seasonally adjusted annual rate of 1.46 million units last month, dropping from November’s pace of 1.56 million.
Still, homebuilding has improved from a year ago, with housing starts up 7.6% from the rate of 1.357 million units in December 2022.
In other good news for expanding the inventory of homes, building permits ticked up in December, climbing 1.9% from November’s revised number to a seasonally adjusted annual rate of 1.467 million.
Permits were 6.1% higher than a year ago.
Even though construction starts slowed to end 2023, there are tailwinds with mortgage rates trending lower that will help construction this year, said Kelly Mangold of RCLCO Real Estate Consulting, in a statement.
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While average mortgage rates have ticked higher the past few weeks, they have settled at around 6.6%, one full percentage point lower than last year’s peak of 7.79%, according to Freddie Mac. And they are expected to continue to fall slowly in 2024.
Homebuilder sentiment in January is strong, according to a separate survey released on Wednesday, which showed optimism about the new construction market is the highest it has been since September.
New construction has benefited from the low inventory of homes on the resale market, where homeowners are reluctant to sell and give up their ultra-low mortgage rate for much higher prevailing rates. As mortgage rates come down, Mangold said, the resale market may become more active.
“The resale market, which has been relatively silent in 2023, may provide increased competition to the new home market if rates decline to a point that potential sellers feel less locked in to their mortgage than they did in 2023,” she said.
Expectations of lower mortgage rates in 2024 are a boon to homebuyers who may have more home options to choose from in the coming year.
New construction home completions were at a seasonally adjusted annualized rate of 1.574 million, which is 8.7% above November and 13.2% above the completions a year ago.
“Looking ahead, buyers who have been sidelined in 2023 may enter the market in 2024 if conditions improve, and lower rates will bring increased affordability to buyers,” Mangold added.
Applications for mortgages to buy a newly built home were up 22% from a year ago, although they were down 4% in December from the month before, according to a separate survey released Thursday by the Mortgage Bankers Association.
“The low level of existing homes for sale continues to divert prospective buyers to newly built homes,” said Joel Kan, MBA’s vice president and deputy chief economist, in the survey’s release.
The average loan size for new homes increased from $390,049 in November to $405,368 in December.
