What Happened in 2023 and What to Expect in 2024

Every year, Tony Weick, president of our Bell Bank Mortgage division, takes a New Year's look back at the prior year and assesses the mortgage industry outlook for the year ahead.

Here's a sneak peek at this year's mortgage outlook from Tony! Watch for it in Bell's upcoming customer publications as well.

Opportunities on the Horizon After a Year of Headwinds
As we enter 2024, it's important to look into the past to understand where the mortgage industry is today and consider the trends expected in the future.

Looking back at 2023, we saw hopes that the tightening cycle was coming to an end replaced by even tighter conditions, with rates rising to higher levels than most thought conceivable. In the mortgage industry, instead of headwinds beginning to subside, challenges only became more severe as the year continued.

Let's take a closer look at where we were, where we are currently and where we think we are headed during these ongoing times of uncertainty.

Economic Factors and Interest Rates
Throughout 2023, even amidst ongoing tightening measures, the overall economy remained resilient – too resilient in the eyes of many, which led to continued measures to slow inflation to the Federal Open Market Committee's (FOMC's) stated target of 2%. After an extended period of low rates, we saw continual rate hikes over the last 16 months, reaching 5.50% in July 2023. While the fed funds rate does not directly impact mortgage rates, they do typically trend in a similar direction.

Additionally, the treasury bond market – which mortgage rates are closely tied to – also saw significant increases over the course of the last few years, eventually reaching 5% in late October 2023. This spike in treasury yields also led to mortgage interest rates rising above 8% in November, the highest level in over 23 years.

Rates began to fall shortly after, but questions remain whether we've seen the peak. The overriding consensus is rates will begin to decrease, but nobody knows when that will begin, or how fast or how far the decline ultimately will be. In terms of general forecasts, most prognosticators expect rates to decrease gradually starting early this year and continuing over the next few years.

What will rates look like in the future? There are no crystal balls, but if we are indeed near the high point of the cycle, economists expect inflation to continue to cool and for mortgage rates to begin to cool as well. With rates ending 2023 roughly in the low-7% range, expectations are to see rates approaching the mid- or even low-6% range by the end of 2024.  

However, it is important to remember interest rate movement is rarely a straight line, and as we have experienced over the past few years, many believe we will continue to see significant volatility as the trend line changes directions as well.

Housing Inventory and Values
As it relates to available homes for potential buyers, we continue to see a severe shortage of what the industry would consider healthy. This has been a common theme for the past couple years, and there are a number of reasons why. Over the past decade, new construction activity has lagged behind where many believe it should run. Also during this timeframe, many single-family housing units have been acquired by large institutions, or even hedge funds, and turned into rental properties.

The third major factor has been labeled the “handcuff" factor, as the majority of current homeowners with financing have rates in the 3-4% range, far below current levels. That's keeping many from considering selling. When homeowners consider their current rates doubling (or more), and the higher payments associated with new rates, that becomes too large a hurdle for many people to accept. As rates begin to retreat, this will become less of an issue.

Over the past few years, home appreciation has been very significant, and in some geographies even extreme. Since 2020, markets on the lower end of the scale have seen the value of homes increase more than 20%, and on the upper end some locations have seen prices increase 60-70% or more during the same timeframe.  

While the pace of appreciation definitely slowed in 2023 to around 4-5%, when looking over the past four years, home prices have increased roughly 35% on average across the entire country. One of the benefits of homeownership over time is the ability to put your home equity to work for you through an equity (cash out) refinance. In 2023, even during a time of increasingly high interest rates, refinances made up more than 20% of all loans being done, with the vast majority seeing homeowners pull equity out for various reasons.

For all of the reasons mentioned above, affordability has become a bigger challenge than ever for many Americans. In the past, people focused on the size of their potential payments when considering whether they could afford a home, but as the cost of entry has increased, the initial down payment has become an equally important challenge.

Many still wrongly believe it takes 20% down to buy a home, but there's been an increased industry commitment to making sure potential homeowners understand all available options. From lenders to secondary market investors to local governments, many around the industry continue to develop more programs to help overcome the affordability challenges for qualified applicants.

Moving Forward
As the mortgage and real estate industries see positive opportunities on the horizon for 2024, we at Bell Bank Mortgage also expect great things for our business partners and clients. We'd love to talk to anyone who's thinking about building or buying a new home, or considering refinancing alternatives, to help determine what's in their best interests. As always, we welcome new business and referrals and are honored to serve our clients and partners.