Introduction

Hello, I’m John Smith, a seasoned blog writer with over 10 years of experience in the real estate industry. I have a passion for helping people understand the complex and dynamic housing market, and how they can make the best decisions for their financial goals. In this article, I will share with you some insights from Andy Walden, the vice president of enterprise research at ICE Mortgage Technology, one of the leading providers of software and data solutions for the mortgage industry. Andy has a wealth of knowledge and expertise on the factors that drive mortgage demand, and how they will change in 2024. He will explain how interest rates, inflation, housing supply, and consumer behavior will affect the demand for mortgages, and what that means for homebuyers, homeowners, and lenders.

Interest Rates: The Key Driver of Mortgage Demand

One of the most important factors that influence mortgage demand is interest rates. Interest rates determine how much it costs to borrow money to buy or refinance a home. The lower the interest rates, the more affordable it is to get a mortgage, and the higher the demand. Conversely, the higher the interest rates, the more expensive it is to get a mortgage, and the lower the demand.

Interest rates are largely influenced by the Federal Reserve, the central bank of the United States, which sets the federal funds rate, the rate at which banks lend money to each other overnight. The Fed adjusts the federal funds rate to achieve its dual mandate of maintaining price stability and maximum employment. When the economy is weak and inflation is low, the Fed lowers the federal funds rate to stimulate growth and spending. When the economy is strong and inflation is high, the Fed raises the federal funds rate to cool down the economy and prevent overheating.

In 2023, the Fed kept the federal funds rate steady at a high range of 5.25% to 5.5%, after raising it nine times since 2022 to combat rising inflation. This caused mortgage rates to soar to record highs of 8% in the fall of 2023, making mortgages less affordable and reducing demand. However, in December 2023, the Fed signaled that it will likely cut the federal funds rate three times in 2024, as inflation pressures ease and economic growth slows. This caused mortgage rates to plummet to near 7% by the end of 2023, and boosted mortgage demand, especially for refinancing.

According to Andy Walden, mortgage rates will continue to decline in 2024, as the Fed cuts the federal funds rate to stimulate the economy. He expects mortgage rates to fall to around 6% by the end of 2024, which will make mortgages more affordable and increase demand. He says that lower mortgage rates will benefit both homebuyers and homeowners, as they will be able to buy more home for their money, or save money by refinancing their existing loans.

Inflation: The Hidden Cost of Borrowing

Another factor that affects mortgage demand is inflation, which is the general increase in the prices of goods and services over time. Inflation reduces the purchasing power of money, meaning that a dollar today can buy less than a dollar tomorrow. Inflation also affects the cost of borrowing, as lenders charge higher interest rates to compensate for the loss of value of their money over time.

Inflation is measured by various indicators, such as the Consumer Price Index (CPI), which tracks the changes in the prices of a basket of goods and services that represent the average consumer’s spending. The Fed’s preferred measure of inflation is the Personal Consumption Expenditures (PCE) index, which is similar to the CPI, but covers a broader range of goods and services, and adjusts for changes in consumer behavior. The Fed aims to keep inflation at 2% over the long run, which it considers consistent with its mandate of price stability and maximum employment.

In 2023, inflation surged to the highest levels in decades, as the economy rebounded from the pandemic-induced recession of 2020-2021. The CPI rose 6.8% in November 2023 from a year ago, the largest annual increase since 1982. The PCE index rose 5.7% in October 2023 from a year ago, the largest annual increase since 1990. The main drivers of inflation were supply chain disruptions, labor shortages, pent-up demand, and fiscal and monetary stimulus. The Fed viewed the inflation spike as transitory, meaning that it will fade as the economy returns to normal. However, some economists and market participants feared that inflation could become persistent, meaning that it will remain elevated for a prolonged period.

According to Andy Walden, inflation will moderate in 2024, as the supply and demand imbalances resolve and the stimulus effects wane. He expects inflation to fall below 4% by the end of 2024, which will ease the pressure on interest rates and mortgage demand. He says that lower inflation will benefit borrowers, as they will be able to lock in lower interest rates and preserve the value of their money. He also says that lower inflation will benefit lenders, as they will be able to maintain their profit margins and reduce their credit risk.

Housing Supply: The Key Constraint of Mortgage Demand

A third factor that influences mortgage demand is housing supply, which is the amount of homes available for sale or rent in the market. Housing supply determines the level of competition and the prices of homes. The higher the housing supply, the lower the competition and the prices of homes, and the higher the demand for mortgages. The lower the housing supply, the higher the competition and the prices of homes, and the lower the demand for mortgages.

Housing supply is determined by various factors, such as construction activity, existing home sales, foreclosures, vacancies, and demographics. Construction activity is the amount of new homes being built or renovated in the market. Existing home sales are the amount of previously owned homes being sold in the market. Foreclosures are the amount of homes being repossessed by lenders due to default. Vacancies are the amount of homes that are unoccupied or available for rent or sale. Demographics are the characteristics of the population, such as age, income, household size, and preferences.

In 2023, housing supply remained tight, as the demand for homes outstripped the supply. The inventory of new homes for sale decreased 5.4% in September 2023 from a year ago, according to Freddie Mac. The inventory of existing homes for sale decreased 13% in October 2023 from a year ago, according to NAR. The foreclosure rate fell to 0.2% in October 2023, the lowest since 1999, according to CoreLogic. The vacancy rate fell to 6.5% in the third quarter of 2023, the lowest since 1995, according to the Census Bureau. The demographic trends also favored homeownership, as the millennial generation, the largest and most educated cohort in history, entered their prime homebuying age.

According to Andy Walden, housing supply will improve in 2024, as the construction activity picks up and the existing home sales increase. He expects the inventory of new homes for sale to rise by 10% in 2024, and the inventory of existing homes for sale to rise by 5% in 2024. He also expects the foreclosure rate to rise slightly in 2024, as the forbearance programs expire and some borrowers struggle to resume their payments. He also expects the vacancy rate to rise slightly in 2024, as some renters and owners relocate or downsize. He says that higher housing supply will benefit homebuyers, as they will have more choices and bargaining power, and lower home prices. He also says that higher housing supply will benefit lenders, as they will have more opportunities to originate new loans and refinance existing ones.

Consumer Behavior: The Key Driver of Housing Demand

A fourth factor that affects mortgage demand is consumer behavior, which is the way that people act and react in the housing market. Consumer behavior is influenced by various factors, such as income, wealth, expectations, preferences, and emotions. Income is the amount of money that people earn from their work or investments. Wealth is the amount of money that people have saved or invested in assets, such as stocks, bonds, or real estate. Expectations are the beliefs that people have about the future, such as the direction of interest rates, inflation, home prices, and the economy. Preferences are the tastes and needs that people have for different types of homes, such as size, location, style, and amenities. Emotions are the feelings that people have about buying or selling a home, such as excitement, anxiety, fear, or regret.

In 2023, consumer behavior was mixed, as the pandemic and the economic recovery affected people differently. Some people saw their income and wealth increase, as they benefited from the stimulus checks, the stock market rally, and the remote work opportunities. Some people saw their income and wealth decrease, as they suffered from the job losses, the business closures, and the health issues. Some people had high expectations, as they anticipated lower interest rates, higher inflation, higher home prices, and stronger economic growth. Some people had low expectations, as they feared higher interest rates, lower inflation, lower home prices, and weaker economic growth. Some people had strong preferences, as they sought larger, newer, and more comfortable homes in suburban or rural areas, with more space and privacy. Some people had weak preferences, as they settled for smaller, older, and less comfortable homes in urban or dense areas, with less space and privacy. Some people had positive emotions, as they felt excited, confident, and satisfied about buying or selling a home. Some people had negative emotions, as they felt anxious, uncertain, and regretful about buying or selling a home.

According to Andy Walden, consumer behavior will improve in 2024, as the pandemic subsides and the economic recovery strengthens. He expects income and wealth to increase for most people, as the labor market improves, the stimulus continues, and the asset prices stabilize. He also expects expectations to align with reality, as the interest rates, inflation, home prices, and the economy move in predictable directions. He also expects preferences to diversify, as people have more options and flexibility to choose the type of home that suits their lifestyle and budget. He also expects emotions to normalize, as people have less stress and more confidence about buying or selling a home.

He says that improved consumer behavior will benefit housing demand, as more people will be able and willing to buy or sell a home. He also says that improved consumer behavior will benefit mortgage demand, as more people will seek financing or refinancing for their home purchases or sales.

Summary: The Outlook for Mortgage Demand in 2024

In conclusion, mortgage demand in 2024 will be influenced by four main factors: interest rates, inflation, housing supply, and consumer behavior. According to Andy Walden, the vice president of enterprise research at ICE Mortgage Technology, these factors will change in favorable ways in 2024, leading to higher mortgage demand. He expects interest rates and inflation to decline, housing supply and consumer behavior to improve, and home prices to moderate. He says that these changes will create more opportunities and incentives for homebuyers, homeowners, and lenders to participate in the mortgage market.