With rising rates keeping inventory and sales down, 2023 has seen a holding pattern for many real estate owners. Prices have held steady, but there has not been much movement in the market.
That’s likely to change in a major way as we head into 2024.
As the founder and president of Underwood Law Firm, a California-based boutique law firm that specializes in partition actions, I have a unique perspective on the real estate market. A partition action is a legal method that allows a property owner in a bad real estate relationship to use the court system to force the sale. Through my work, I have seen how trends in the larger economy can impact this decision, and how anticipated shifts in 2024 might play out for property owners.
SINKING INTEREST RATES SHOULD LEAD TO MORE SALES ACTIVITY
As inflation continues to decrease and the economy looks to be normalizing, mortgage interest rates are already starting to drop ahead of projected rate cuts by the Federal Reserve. While prices remain elevated, lower mortgage rates make buying more affordable, especially for first-time buyers without home equity to carry over.
This should result in a larger and more active pool of buyers, many of whom were looking to buy but put their plans on hold due to rising rates. As they return, creating a more competitive bidding market, sellers who are on the fence might think about getting in the game.
REAL ESTATE AGENT COMMISSIONS ARE LIKELY TO GO DOWN
Last month, a Missouri court handed down a $1.8 billion verdict against the National Association of Realtors and two brokerage firms, as the result of a lawsuit accusing them of conspiring to set artificially high real estate commissions. This seismic decision is very likely to change the commission structure set by these brokerage firms, possibly reducing commissions from their current 5 to 6 percent by half.
This will not only reduce the cost borne by buyers and sellers in traditional real estate transactions, but also make partition actions less expensive, as well. With a smaller commission going to real estate agents, the property owners in a partition will be able to keep more of their equity. Reducing this cost on the margin could make the difference for many buyers and sellers in deciding whether to pursue a real estate transaction in 2024.
VACATION RENTAL CRACKDOWNS ARE LIKELY TO CONTINUE
This year’s notable slowdown in vacation rental bookings has spawned several stories about an “Airbnbust.” Some of this is certainly due to rising rates making vacation rentals less profitable as an investment—especially for latecomers to the field—but there have also been regulatory crackdowns, such as in New York, which effectively banned most short-term vacation rentals through a new law.
While this has caused hotel prices in New York to skyrocket, it has not depressed travel, and local residents do not seem to miss the transient groups of tourists partying in their neighborhoods. College towns seem to be the next battleground for this movement, as students and longtime residents are finding themselves priced out by landlords buying places to use them as vacation rentals during football season. Expect this anti-vacation rental groundswell to continue.
THERE IS STILL A LOT OF PENT-UP DEMAND IN THE MARKET
Predicting future prices is a fool’s errand, but it is clear that there is a lot of demand from millennials and younger generations for single-family homes. The average age of a first-time homebuyer is now 36 years old—the oldest on record. These are people who have been in the workforce for 15-plus years, have formed families and are looking for more space.
Skyrocketing prices during COVID and soaring interest rates in 2023 have made their homeownership dreams harder to attain, but these potential buyers are waiting for the right opportunity to make their move. If rates continue to drop, more of these buyers should come off the sidelines.
MOVEMENT FROM CORE CITIES TO SUBURBS SHOULD CONTINUE
Nearly three full years after COVID first came to the United States, we have settled into our new normal, with a lot more hybrid and remote work than before. With the commute to an office in a central business district now no longer a factor for many (or something to be endured once or twice a week rather than all five days), many homebuyers are likely to follow the current trend of optimizing for space and community, rather than traffic or convenience.
Sellers in further-flung suburbs, exurbs and resort communities should benefit from this, as their pool of potential buyers has grown to include a whole universe of former office workers who now pursue their careers from home. This new way we work is changing communities, and producing windfalls for some longtime property owners. It’s truly a Merry Christmas for many of them!
Eli Underwood is founder and president of Underwood Law Firm, a boutique law firm specializing in partition actions, with offices throughout California