Amid all the happy talk about the U.S. heading for a soft landing, housing — which makes up as much as 18 percent of GDP — could still pose a major challenge to the economy, according to analysts MM caught up with for their take on the 2024 outlook for the industry. But everything depends on the Fed. At the heart of the issue is a major supply crisis 15 years in the making, following years of under-building in the wake of the 2008 financial crisis. The National Association of Realtors pegged the shortage at between 5.5 million and 6.8 million units in 2021, noting that residential fixed investment had fallen as a share of GDP from its typical level of 5 percent to 3 percent in the years after the crisis. The shortage in supply, paired with a growing population and strong demand, has relentlessly driven up the cost of housing, making the normally interest-rate-sensitive sector slow to respond to Fed interest rate hikes. The effects of the supply crunch could become a political issue this election year, according to Isaac Boltansky, director of policy research at BTIG. “My sense is that we could see the housing affordability and supply crises elevated [on] the campaign trail. From homeownership being out of reach to institutional investors in the space, there’s a fair amount of political hay to be made from that corner of the economy.” Lawrence Yun, chief economist at the National Association of Realtors, expects mortgage rates — currently at 6.6 percent for a 30-year-fixed — to fall to about 6.3 percent by the end of the year if the Fed loosens its grip as expected and starts to cut rates. That’s still a lot higher than in 2020, but it’s down from the 7.8 percent rate Freddie Mac notched in October. “With mortgage rates measurably lower already, this is a sign that the worst in housing, at least in terms of home sales, is over — there will be more transactions, more buyers coming onto the market,” Yun said. “It seems like we are almost getting a perfect soft landing, but something to worry about is what happens if inflation somehow remains high, If the job market remains exceptionally tight,” he added. “Higher inflation just means the Fed will be much more cautious, which means mortgage rates will remain on the high side.” Michael Bright, CEO of the Structured Finance Association, is also keeping an eye on the Fed: “We are closely watching the most recent drop in interest rates and hopeful that they have found a range they can stay in,” he said. “That would very much help this year’s spring buying season, which we are badly in need of.” Lower rates should free up some homeowners locked into the 3 percent mortgages of 2020 to list their homes, according to Rob Dietz, chief economist at the National Association of Home Builders. “One of the challenges is that mortgage rates moved up so quickly that a lot of homeowners had mortgage rates well below market rate, and that’s one of the factors that in the short term has held back inventory” coming onto the market, he said. Builder sentiment is improving, Dietz noted. But “as the volume of homebuilding rebounds, we expect lumber prices to go up again,” he said. “There’s going to be stops and starts along the way and those supply-side challenges remain.” Real, lasting improvements to the supply deficit won’t happen until the “second half of this decade,” Dietz said. David Dworkin, president and CEO of the National Housing Conference, is skeptical that mortgage rates will fall enough to entice wary sellers off the sidelines this year. “The move-up market, which is a key to having a healthy inventory level, is still frozen and is likely to be frozen throughout the entire year unless we go into a recession, which is not likely,” Dworkin said. “Unless the Fed significantly cuts rates, the cost of moving up is prohibitive,” Dworkin said. “The income necessary to buy the exact same house in 2024 compared to 2019 is double because of home price appreciation and interest rate growth.” Happy Wednesday. Thoughts on where housing will go in 2024? Share them with me at kodonnell@politico.com.
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