As the year began in 2024, the housing market initially seemed poised to leave behind the uncertainties and stress of the previous year. Mortgage rates, which had peaked at 8% in October, dropped to the upper 6.7% range in early January. Some industry observers even predicted lower prices. However, rates are now on the rise again, reaching nearly 7% as of Monday. Several housing forecasters have adjusted their predictions, indicating that home prices are likely to continue increasing throughout the year.

Moody’s Analytics chief economist, Mark Zandi, reveals that his forecast in December 2022 expected national home prices to decline by 2% by December 2023. Instead, prices grew by 5%. Zandi attributes this stronger-than-anticipated growth to a severe lack of supply in the housing market. The reluctance of existing homeowners to sell due to favorable mortgage rates has contributed to the shortage.

The combination of increasing mortgage rates and home prices has created challenges for many first-time homebuyers, locking them out of the market. Zandi emphasizes that the higher prices are beneficial for current homeowners, leading to a significant increase in their wealth. However, this poses a considerable problem for potential first-time homebuyers, as affordability has collapsed, making homeownership seem nearly impossible.

Despite reports indicating a rise in new housing starts and completions, the U.S. still faces a substantial housing deficit, estimated at 1.5 million to 2 million units by Moody’s Analytics. The analysts note that even with over 1 million housing units built in each of the past two years, there is a significant shortfall in single-family housing stock, resulting from years of underbuilding since the Global Financial Crisis.

Zandi points out that the market will eventually need to shift as people with changing life circumstances will likely need to move, creating more inventory and putting downward pressure on prices. However, this shift did not occur in 2023.

To address the housing affordability crisis, Zandi and others advocate for increasing housing supply. He suggests expanding the low-income housing tax credit to include affordable single-family homes for homeownership, providing builders with a meaningful tax incentive to construct homes at price points affordable for first-time buyers. Moody’s Analytics colleagues emphasize that resolving the housing shortage requires a joint effort and creativity from both the private and public sectors, acknowledging that there is no quick and straightforward policy solution. Instead, a multifaceted and persistent policy response is necessary.