Though the tumultuous recent years have deviated significantly from historical norms, it appears the housing market is due for a gradual shift back towards stability.

According to research from the Fannie Mae Economic and Strategic Research (ESR) Group, the housing market appears poised for a gradual return to a more balanced state in 2024.

The ESR anticipates decline in mortgage rates throughout 2024, loosening the “lock-in effect” – a phrase referring to current homeowners who bought or refinanced during or before the coronavirus crisis. Because of the ultra-low mortgage rates, they have had little motivation to sell, as they would face higher mortgage rates on their next homes.

But if rates drop below 6% by the end of the year, the annual pace of existing home sales could rise to as much as 4.5 million units, much closer to pre-pandemic levels.

Today’s homeowners are still flush with home equity, and the lower rates should also drive an increase in refinance volumes, building on several recent months of momentum.

Fannie Mae expects supply will remain tight, and affordability will remain an issue. The ongoing scarcity will likely push prices higher. Builders should continue to benefit, with even more new home starts and sales than in 2023.

With more than 45 million potential young buyers seeking affordable homes, new home builders may consider revisiting historical models for mass-production. In 1950s and 60, builders gained profits by producing thousands of simple, practical homes – known as “speculative housing.”

However, modern challenges such as regulatory hurdles and fluctuating costs pose obstacles, prompting builders to lean towards higher-end and custom housing. Experts continue to agree there must be more construction at all price ranges to bring full housing recovery.

The gradual improvement in the housing market is occurring against the backdrop of a slow-growing economy. However, the Federal Reserve is signaling future rate cuts, contributing to a more optimistic outlook. If mortgage rates continue to decline, affordability should increase.

While challenges persist, proactive measures and favorable market conditions are expected to support the market's resilience and gradual recovery in 2024 and beyond.