The labor market will likely weaken, leading to slower wage growth in 2024 and exacerbating the housing market’s affordability problem, according to a recent report from First American.
According to First American Data & Analytics’ Real House Price Index (RHPI), potential homebuyers are being shut out of the market not only because of lack of inventory and rising home prices, but also because their incomes are not keeping pace with inflation.
“In September, the RHPI jumped up by 15 percent on an annual basis, dragging housing affordability to the lowest point in over three decades,” says Mark Fleming, chief economist at First American, in the report. “Two factors drove the sharp annual decline in affordability – a 6.2 percent annual increase in nominal house prices… and a 1.1 percentage point increase in the 30-year, fixed mortgage rate compared with one year ago.
“For home buyers, holding prices constant, the only way to mitigate the loss of affordability caused by higher mortgage rates is with an equivalent, if not greater, increase in household income,” Fleming says. “Even though household income increased 3.1 percent since September 2022 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher rates and rising nominal prices. Looking ahead to 2024, what will happen to income, interest rates, house prices and affordability?”
Fleming says the labor shortage that peaked in 2022 has since been narrowing and “will likely continue to narrow in 2024, which means the pace of wage growth will likely slow.”
This slowdown in wage growth will be partially offset by gradually decreasing mortgage rates, which are expected to drop to an average of 6.6% by the end of next year.
“Average forecasts from the industry project that mortgage rates will end 2024 at approximately 6.6 percent, as inflation is expected to recede and the Federal Reserve is expected to stop its interest rate hikes, which may boost consumer house-buying power,” Fleming says in the report.
Lack of inventory, however, will continue to be an issue.
“The housing market continues to suffer from an imbalance between housing supply and demand, which puts upward pressure on prices,” Fleming says. “As a result, annual nominal house price appreciation will likely continue to remain positive nationally, but return closer to the historical average of 3-to-4 percent, as the housing market adjusts to the reality of higher mortgage rates. The average of different industry forecasts suggests a 3.5 percent annual increase in nominal house price growth by the end of 2024.”