When it comes to understanding the critical intersection of economic trends and real estate transactions, Rick Sharga is your guy.
This past January, the economist and CEO of CJ Patrick Company took the Main Stage once again at Side x Side to share his predictions for what’s to come in 2024.
Below, you’ll find his valuable insights on everything from recession fears to creative ways to source more opportunities. Read up and feel empowered to help your clients make strategic decisions in today’s challenging market.
U.S. Economic Update
No recession (so far)
Roughly 85% of economists believed the United States would enter a recession in 2023. For 2024, that number has decreased to 60%. But most economists, Rick included, agree that a recession has been delayed, rather than avoided entirely.
Rick cited two historical factors that lead him to believe a mild recession may be on the horizon. The first is precedent: Since World War II, the Federal Reserve has raised the effective federal funds rate 11 times, and eight times out of 11 a recession followed. In 2023, the Fed hiked the funds rate several times to get inflation under control (which was successful, as inflation has dropped nearly two-thirds from its peak last year).
The second historical factor is an inverted yield curve, aka when the yield on a longer-term investment becomes lower than the yield on a short-term investment. The last seven times we’ve seen a yield curve inversion, a recession has followed — and we are currently seeing the deepest and longest yield curve inversion of the past 50 years.
That said, since many other economic indicators are quite strong, Rick predicts that if we do see a recession, it is likely to be a mild one.
GDP remains strong
Gross domestic product (GDP), the primary barometer economists use to measure the health of the economy, continues to be strong. GDP growth went up to over 4% growth in Q3 and hit 3.25% in Q4, significantly overshooting the predictions.
GDP growth is heavily tied to consumer spending, meaning consumers nationwide have been actively engaged.
Unemployment is near historic lows
As of late January, unemployment sat around a remarkably low 3.7%. Traditionally, 5% unemployment has been considered full employment for the country. There continue to be more jobs available (around 8.5 million) than people looking for work (around 6 million), which has resulted in an increase in wage growth. The average hourly wage across the country right now is over $29 per hour.
Consumer sentiment is low, but spending is high
The confidence consumers have in the economy typically directly correlates to how much money they spend, particularly when it comes to big-ticket items like property. The Covid-19 pandemic, combined with supply chain issues and various global conflicts, have led to a decline in consumer sentiment over the past few years.
In spite of that decline, consumers have continued to spend. However the concern remains that if consumer sentiment does not start to improve, spending may pull back.
Housing Market Forecast
If a recession is coming, it won’t have a huge impact on housing
Rick predicts that in the case of an upcoming mild recession, unemployment isn’t likely to rise much above 5%, which is already considered full employment. Additionally, the people who first lose jobs in a recession are typically renters, not homeowners. So long as the unemployment rate stays beneath 6%, Rick does not anticipate a significant impact on the housing market.
Mortgage rates will decrease, slightly boosting demand
Mortgage rates will likely decline gradually over the course of the year. Both the Mortgage Bankers Association and Fannie Mae are now suggesting that we could close out 2024 with rates just below 6%.
Rick believes the declining rates will entice more buyers into the market, but he does not expect more sellers to come to market until the rates hit the low-to-mid 5% range.
Inventory will remain low, raising prices
While inventory has improved from 2023, it remains very low. The United States has a 3.2-month supply of existing homes available, far below the 6 months we would like to see in a normal market.
Two-thirds of current homeowners have an active mortgage rate of 4% or less, making it unaffordable for them to move. If they were to sell and move into an equally priced home at a 7% mortgage rate, they would double their monthly payments. That’s why, by and large, we can expect not to see a surge of existing homes come to market in 2024.
As more buyers have entered the market, increasing competition, prices have risen roughly 6% across the country.
Keep an eye on …
New construction homes
While we only have a 3.2-month supply of existing homes available, we have a 7-month supply of new homes, which is normal for the new home market. What’s more, the price differential between new and existing homes has contracted to only five to 10%, in large part because builders have shifted focus to building smaller and slightly less expensive homes.
Investors
Investors account for roughly 30% of home sales. And despite what you might be seeing on TV, the overwhelming majority of investor purchases are not from large, institutional investors, but from mom-and-pop and mid-sized investors. If you’re not working with investors, said Rick, you’re missing out on 30% of the market.
In this market, investors tend to be leaning toward rental properties rather than fixing and flipping properties. That’s because, with interest rates still on the high side, many would-be buyers can no longer afford to do so, increasing the demand for rentals.
Homeowners in foreclosure
While foreclosure activity has increased roughly 10% year over year, only 0.6% of loans are in foreclosure, down significantly from the 1-1.5% rate you expect to see in a normal market.
Of those borrowers in foreclosure, 80% have at least 20% equity in their homes. That creates an opportunity for local-market expert agents to reach out to homeowners in the early stages of foreclosure, inform them of the equity they’re sitting on, and let them know they have the option to sell the property and protect that equity.
In Summary
- A recession is still on the table, but since other economic indicators are strong, it will likely be a mild one and not have a large impact on the housing market.
- Mortgage rates will drop, enticing buyers to re-enter the market — but not sellers, many of whom are still locked into sub-4% rates. As a result, inventory will stay on the low side, keeping upward pressure on prices.
- Consider working with developers, investors, and homeowners in foreclosure to source more opportunities in 2024.
