2024 Investment Outlook
Exploring the impact of today’s interest rates and the 2024 presidential election on your investments.
Persistently higher interest rates continue to create headwinds for the U.S. housing market.
2023 was the slowest year for existing home sales since 1995.
New home sales rose, however, reflecting the fact that housing demand remains strong.
The U.S. housing market remains unsettled in an environment of persistently higher mortgage rates. The costlier nature of mortgages is affecting the availability of existing homes for sale and its reduced the pool of potential homebuyers who can afford today’s mortgage rates. In 2023, this resulted in the slowest year for existing home sales in the U.S. since 1995.1 On the bright side, sales of new homes rose in 2023, a sign that demand for housing remains strong.
The Federal Reserve (Fed) raised short-term interest rates in 2022 and 2023. As a result, mortgage rates moved much higher, altering the landscape for homebuyers and sellers alike. Notably, many existing homeowners are reluctant to sell their current homes only to assume new, potentially more costly mortgages. This has led to a reduction in the supply of existing homes, requiring homebuyers to increasingly rely on new home construction inventory.
The Fed shifted monetary policy beginning in March 2022 in response to rising inflation. The Fed raised short-term interest rates eleven times in a period of 16 months. Its goal was to slow the broader economy and lower inflation. Mortgage rates rose quickly in response, leading to increased monthly payments for home buyers.2 The combination of mortgage rates exceeding levels not seen in years and home prices rebounding to new highs resulted in unusual conditions that muddled the housing market.
“The combination of higher home prices and elevated mortgage rates creates a meaningful headwind for new homebuyers,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.
“Today’s mortgage rates reflect higher yields in the bond market, but added to that is the widened premium spread between 10-year U.S. Treasury notes and mortgage rates,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. The spread has recently been nearly twice what it was two years ago, contributing to more burdensome mortgage rates. “The wider spread between mortgage rates and Treasury rates reflects a lack of buyers for mortgage-backed securities,” says Haworth. “Buyers of mortgage-backed bonds currently demand a premium to make that investment.”
Home prices, like those for any product or service, are driven in large part by supply and demand. Prior to 2022, supply lagged demand and home prices skyrocketed. But after Fed rate hikes began, housing demand dipped and prices followed suit, falling between July 2022 and January 2023. But according to the S&P CoreLogic Case-Shiller 20-City Composite Home Price Index, home values fully recovered from that seven-month decline. By October 2023, average home prices nationwide reached new, all-time highs, but values slipped modestly in November.3
“Some who track the housing market predicted that average home prices nationally would fall by 10-15%,” says Matt Schoeppner, senior economist at U.S. Bank. Yet at their low point in the current cycle, home prices (based on the Case-Shiller Index) were down only 6.8% before rebounding to new highs.3
For all of 2023, mortgage applications for home purchases fell to their lowest levels since 1995. At the end of December 2023, total application activity for the year was 18.7% lower than in 2022. In late January 2024, the unadjusted Purchase Index for mortgage applications was 20% lower than the same week a year earlier.4
Existing home sales showed a modest increase in November, after declining in seven of the previous eight months, but fell again in December. Existing home sales remain 6.2% lower than the previous year.1
New-home sales were a bright spot, rising 8.0% in December 2023. For all of 2023, new home sales rose 4.2% compared to 2022.5 Haworth notes that those entering the housing market for the first time may find better opportunities in the new construction market rather than pursuing the existing home market, where supply continues to lag. “Homebuilder sentiment turned negative at the end of 2023,” says Haworth. “We hope that doesn’t translate into a slowdown of new home construction, because housing remains undersupplied, and more inventory is needed to meet demand.”
The average 30-year mortgage rate in the U.S., which was below 3% until late 2021, peaked at 7.79% in late October 2023.6 That represented the highest mortgage rate since November 2000. The result is more costly borrowing, which can dampen housing market activity. Rates have since declined but remain much higher than pre-2022 levels.
Higher mortgage rates and home prices make affordability a major issue for those trying to enter the housing market. According to the residential real estate brokerage firm Redfin, the median monthly mortgage payment in January 2024 (based on average 30-year mortgage rates and home prices) was $2,545, down 7% from an all-time high of $2,735 in mid-October.7 However, steeper monthly mortgage costs continue to be a burden for those looking to purchase a home. “The combination of higher home prices and elevated mortgage rates creates a meaningful headwind for new homebuyers,” says Haworth. “They either need to be able to make a bigger down payment or they must earmark more of their monthly budget for housing costs.”
For those looking to add diversification by including real estate in their portfolios, a commonly used vehicle is a real estate investment trust (REIT). However, higher interest rates create headwinds for REITs.
“Real estate as an asset class was one of the first to be repriced lower in reaction to higher interest rates,” says Tom Hainlin, national investment strategist at U.S. Bank Wealth Management. “Although REITs are often considered a way to hedge the risk of higher inflation, the unfavorable interest rate environment has resulted in REITs underperforming other parts of the equity market,” Hainlin says. “Improved yields on U.S. Treasury securities create cash flows that look much more attractive in today’s market when compared to REITs.” As a result, demand for REITs has fallen. However, after spending much of 2023 in negative territory, REITs enjoyed a modest rebound at the end of the year. For all of 2023, the S&P Developed REIT Index gained 11.69%. Despite the rally, REITs significantly trailed gains of 26.29% for the broader S&P 500, a benchmark measure of U.S. stock market performance. In January 2024, REITs struggled again, with the Developed REIT index down more than 3%.8
Haworth points out that REITs, as an asset class, do still offer opportunities. “Data centers, cell towers and light industrial properties have generally been the best performing REIT sectors as demand remains strong,” says Haworth. “There’s still steady demand for apartments, as well.” But Haworth points out there are areas of weakness, too, such as office properties, that investors may wish to approach with caution.
Fed policy has clearly placed housing and other real estate markets on the front lines of efforts to slow the economy's pace and lower inflation. Thus, regardless of the extent of your real estate holdings, it’s important to keep in mind that the housing market can have a significant impact on the broader economy and capital markets generally. “The formation of households is one of the main drivers of economic growth in the U.S.,” says Hainlin. “It has a large spillover effect on the economy, including materials that go into building or remodeling, and furnishings for homes.”
Be sure to consult with your wealth management professional to determine when and how real estate investments might be a good fit for you.
As interest rates change, learn what the ripple effects across capital markets may mean for investors.
Investing in a real estate investment trust (REIT) is a way to diversify your portfolio. Here's a look at how to invest in REITs and diversify your portfolio into residential and commercial real estate.