Mortgage Rates and the 2024 Housing Market

Higher-than-expected inflation and strong economic data on mortgage rates continues to bring opportunity to the new home market

By Alex Thomas

Higher-than-expected inflation data and strong economic data in April are keeping mortgage rates high, likely pushing back rate cuts from the Fed. Mortgage rates soared to 7.5% in April – the highest since November 2023 – on the back of a slew of strong data releases. However, builders are well-positioned to take advantage of higher-for-longer rates by offering what the resale market often can’t: incentives and move-in-ready inventory.

Inflation’s last leg is proving particularly stubborn for the Fed as prices across the economy rose +0.4% month over month (MOM) and +3.5% year over year (YOY) in March, still well above normal. The labor market also remains strong, with 303,000 jobs added MOM in March, the strongest single month of job growth since May last year. Consumer spending continues to show resilience: Consumers spent $710 billion in March (+4% YOY). March was the strongest single month of retail and food services sales ever in terms of dollars. 

Affordability challenges are keeping millions of households locked in place. Mortgage rates have come down slightly in early May, but economic data remains hotter than expected, which will keep affordability poor over the near term. Higher rates are pricing millions of households out of qualifying for a mortgage they may have qualified for earlier in the year. At 7.5% rates, just 21% of all households qualify for a $400,000 mortgage, compared to 25% at 6.5% rates. 

But it’s not just mortgage rates putting pressure on affordability. Homeowners are also contending with rising costs in the form of property taxes and insurance. Even more stable regions of the country are seeing premium increases to compensate for additional risk in disaster-prone regions like Texas and Florida (where we’ve also started to see notable softness in housing). From a macroeconomic perspective, it’s also important to note that the rapid rise in homeowner’s insurance is much less visible to Fed policymakers since it is excluded entirely from the Consumer Price Index (CPI). 

The result is predictable: millions of consumers locked out of homeownership, and millions of homeowners locked into their current homes at their existing low mortgage rates. Nearly all homeowners with an existing mortgage have a rate below 7%. 

The share of buyers locked into below-market mortgage rates is slowly declining, but the lock-in effect will be slow to wane as homeowners avoid selling unless necessary. Consumer research out of John Burns Research and Consulting’s New Home Trends Institute found that, “waiting for mortgage rates to decline,” is now the most frequently cited factor holding buyers back from actively shopping for a home – the first time any other response has overtaken, “waiting for a life stage change,” in our survey. 

Builders benefit from advantages over resale, namely incentives and move-in-ready inventory. As we’ve noted for many months, incentives like flex cash and rate buydowns give builders a competitive edge over existing homes in a high-rate environment. Buydowns often put monthly payments for new homes on par with portions of the resale market. 

In addition, much of the already-limited inventory on the resale side of the market requires significant repairs before move-in. Our monthly survey of real estate agents found that nationally, nearly one in every three homes listed needs some sort of repair before it is livable, which hugely limits options for buyers. Builders’ ability to offer turnkey inventory at prices comparable to resale (given incentives) continues to position them well in today’s market. 

We expect the new home market to continue to outperform the resale market while rates stay elevated. However, we are carefully watching the inventory environment. Listings are rising as the lock-in effect wanes gradually, and some markets (particularly in Texas and Florida) are at or near 2019 inventory levels. In particular, inventory levels are 40% higher than 2019 in Austin and 25% higher than 2019 in San Antonio – both markets where homes are relatively young and more able to compete with new homes. 

Rising inventory is also impacting price growth: prices rose 2% YOY in Texas as of April, below the 5% national average and the slowest rate of growth of any region. It is critically important to monitor inventory in your markets as we approach the peak of the homebuying season in 2024. Expect the strongest pricing and sales environments for new homes in markets where supply is constrained and where homes are older on average. 

Alex Thomas is a senior research analyst at John Burns Research and Consulting.