Economic Trends and Insights for Today’s Real-Estate Market

The inflation rate in April 2024 was around 3.4%, a slight decrease from the 3.5% figure seen in March. Inflation and the housing market are closely related. Rising real estate prices make for high inflation rates. Increased inflation may then result in high interest rates on mortgages and more expensive homes overall, which can affect closing factors like discount points (commonly referred to as mortgage points) and appraisal fees.

Real estate price increases have contributed significantly to the Consumer Price Index’s monthly all-items increase. Reports suggest that home prices increased 5.5% between February 2023 and February 2024. Shelter and gasoline indexes accounted for over 70% of the monthly all-items increase in April.

When inflation rises, the Fed raises interest rates to combat inflation. The idea is to make borrowing more costly so that demand cools and prices dip. However, this also makes mortgages more expensive. Current mortgage rates for a 30-year fixed loan are around 7.44%, placing homeownership out of reach for many Americans.

Inflation impacts the cost of homes in other ways too. With new construction, the high cost of labor and materials may drive up the price. Currently, a shortage of inventory is compounding the problem and keeping home prices high. Many owners simply aren’t selling, and fewer houses on the market can mean higher prices for buyers to contend with.

 What the future holds

Unsurprisingly, these rising costs have made buyers reluctant to get a mortgage. The Fannie Mae Home Purchase Sentiment Index® (HPSI) revealed that only 20% of survey respondents believe it’s a good time to buy a house, indicating that many consumers may have other priorities.

Even if the inflation rate decreases substantially, home values likely aren’t going to drop anytime soon. Aspiring homeowners may need to decide if they want to proceed with an expensive purchase or wait for the tide to turn.

High employment rates correlate with greater buying power and demand for housing, whereas high unemployment can lead to decreased demand and lower housing prices. Layoffs and fear of job loss may make people hesitant to purchase a home, which may improve inventory and lower home prices. Strong job creation can also create more demand for home purchases.

While the current unemployment rate is still very low (3.9% as of April 2024), lack of inventory and high mortgage rates are keeping homeownership out of reach for many potential first-time buyers. Typically, unemployment results in a slower real estate market, but due to other converging factors, an increase in unemployment may counterintuitively result in more affordable housing. Higher employment may push the Fed to cut interest rates, making mortgages more accessible.

Increased employment in the construction industry may be a huge positive for the real estate market. With 39,000 jobs added in March 2024, it could lead to more new construction inventory to choose from soon enough. This new inventory could trigger a decrease in prices.

Demographic shifts

While interest rates and markets play important roles in determining the course of real estate markets, demographic and cultural changes also make a sizeable impact.

Baby boomers are getting older

As of last year, 51.8% of the total wealth in the United States belonged to the baby boomer generation. This generation is also living longer and is less likely to sell their homes and move. Nearly 40% of Americans born between 1946 and 1964 have lived in their homes for 10 to 19 years. By comparison, millennials are much more likely to move as they switch jobs and grow their families. For many boomers, selling at high profits can mean paying heavy capital gains taxes while taking on a new mortgage is an expensive prospect in the current market.

Millennials retreat to the suburbs

Millennials, meanwhile, are making their way back to the suburbs. Many have been priced out of cities, and while it’s easy to assume that others are opting for suburban life as they marry and have children, there’s a catch. Unlike previous generations, where home buying was usually a joint endeavor between spouses, millennials are buying homes alone. 42% of millennials have purchased a home alone, 10% have purchased a home with a friend, and 7% have purchased alongside a family member (not a spouse or domestic partner).

Remote work and price hikes

While return-to-office mandates are being reinstituted, remote work has made a lasting impact on real estate, too. At the height of the COVID-19 pandemic, many Americans began relocating away from workplaces and closer to friends, family, or simply other places that offered preferable lifestyles. Some also moved to rural areas with smaller populations, seeing an opportunity to buy a cheaper house. This movement may have contributed to increased home prices. A return-to-office in masse may improve the situation slightly, but it’s unlikely that these price hikes will be reversed soon.

Technological advancements, particularly in artificial intelligence (AI), are revolutionizing the real estate industry. The right AI tools can analyze vast amounts of data to identify property trends and provide accurate valuations. Resulting estimates can be comprehensive, informed by photos and relevant metrics like square footage. These valuation tools are useful for buyers, mortgage underwriters, and investors as they can make informed decisions based on market trends and property values.

Mortgage lenders are also exploring the use of AI to assess borrower viability more accurately and efficiently. AI algorithms can evaluate credit scores, income levels, employment history, and other factors to determine the risk associated with lending to a particular borrower. Some tools also take care of repetitive but important tasks, such as alerting users when their mortgage applications are missing certain documents. Additionally, AI-powered real-estate platforms can enhance the property search experience by offering personalized recommendations based on user preferences and behavior. Some companies are already leveraging AI to refine their property listings and valuation models, offering users more precise and tailored search results.