The US real estate market remains a mixture of high mortgage rates, high prices, and tight supply. The toxic traits are increasingly scaring off buyers and sellers, posing significant danger to a sector trying to bounce back from the COVID-19 slowdown. While the average 30-year fixed mortgage rate has eased to lows of 6.62% at the start of the year, it is still high and continues to keep off many potential home buyers.

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In addition, home prices remain at historically high levels, a position fuelled by low housing stock in the market. The median home prices in 2023 came to a close north of $400,000, a historically high level. The high mortgage rates and average prices are increasingly putting off many first-time home buyers. Likewise, many home buyers and investors remain more pessimistic than ever about the US real estate sector early in the year.

US Real Estate Market 2024 - Will it Roar this year...

Amid the high mortgage rates and suppressed inventory levels, the US real estate sector has always remained resilient after returning from the 2008 financial crisis over the past five years; the industry has returned 31.07%, beating the average gain of 7.26% for the S&P 500.

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The US real estate sector is expected to return 41% over the next five years, presenting some of the best investment opportunities for investors eyeing exposure in the industry. Purchasing shares of ReelShares Real Estate Focus Fund is one of the best ways of gaining exposure in the sector facing many challenges amid the current high mortgage rates.

Housing Market Headwinds

Economists at government-sponsored mortgage giant Fannie Mae don’t expect the housing market to come out of a deep freeze anytime soon. The economists remain pessimistic even on the US economy steering away from a recession in 2024. The US real estate sector is expected to remain under pressure for the better part of 2024, going by the high-interest rate environment.

The Federal Reserve hiking interest rates to 22-year highs of between 5.25% and 5.50% is not helping the situation. For starters, it has sparked a significant increase in borrowing costs, something that could make it difficult for many potential home buyers to access cheap capital that they can use to purchase new homes.

As the US Federal Reserve hiked interest rates in the race to tame away runaway inflation in 2022, they made the housing market even more expensive. The rates came against the backdrop of massive stimulus packages that had resulted in too much money in supply. Therefore, the higher rates did not deter people from purchasing houses. Strong demand amid lower supply only triggered a significant spike in home prices.

The supply issue in the market is further compounded by the fact that would-be sellers have little desire or incentive to trade in their current house pegged at 3%. By selling their houses, the home buyers would have to contend with mortgage rates upwards of 6% for new home purchases.

In addition, the high-interest rate environment could pose a significant risk to the US economy. The economy slowing down amid the high-interest rate environment is a possibility. The economy plunging into recession will likely fend off the home-buying sprees as the focus would be on remaining afloat instead of pursuing home purchases for most people.

Real Estate Catalysts

With mortgage rates at about 6.6% at the start of the year, experts say conditions in the US real estate sector will only improve once rates dial back to the 5% range. One of the factors that should bolster sentiments and prospects in the real estate sector is the US Federal Reserve going slow on monetary policy tightening and embarking on interest rate cuts.

Economists are already optimistic that the Fed has peaked on its monetary easing spree on inflationary pressure subsiding significantly. The Fed embarking on interest rate cuts in the first half of the year could be one of the catalysts to fuel activities in the real estate sector. Interest rate cuts should trigger a significant drop in borrowing costs, something that should encourage people to seek cheap capital to purchase new homes.

Nevertheless, inventory levels must be improved if the real estate sector is to register significant improvements.

“For the best possible outcome, we’d first need to see inventories of homes for sale turn considerably higher,” says Keith Gumbinger, vice president of mortgage website HSH.com. “This additional inventory, in turn, would ease the upward pressure on home prices, leveling them off or perhaps helping them to settle back somewhat from peak or near-peak levels.”

Low inventory levels amid pent-up demand are likely to continue bolstering prices. Similarly, a significant cut in interest rates could trigger a significant surge in demand that wipes out any inventory gains that come into being. The natural result would be a significant increase in house prices. Mortgage rates dropping to a more normal upper of 4% to lower 5% range would offer significant support to the embattled real estate sector.

A significant jump in mortgage rates over the past few years has only led to a significant drop in mortgage applications.

“I don’t expect to see a meaningful increase in the supply of existing homes for sale until mortgage rates are back down in the low 5% range, so probably not in 2024,” says Rick Sharia, founder and CEO of CJ Patrick Company, a market intelligence and business advisory firm.

A drop in mortgage rates to below the 5% level would encourage current homeowners to put their houses on sale as they could purchase new homes at much more affordable mortgage rates. An increase in the number of people putting their homes on sale is only expected to bolster inventory levels, something that should cause house prices to drop amid current demand levels.

Bottom Line

The housing market is likely to remain under pressure amid the high mortgage rates and suppressed inventory levels. The likelihood of a housing market crash is low. Today’s homeowners stand on a much more secure footing than they did during the 2008 financial crisis. Most of the home buyers have a positive home equity. Likewise, competition for houses has remained resilient despite mortgage rates soaring.

ReelShares Real Estate Focus Fund offers one of the best ways of shrugging off the headwinds in the US real estate sector and taking advantage of the opportunities that keep on cropping up. The fund invests more than 80% of its assets in a collection of real estate investments, including multifamily property and real estate mutual funds. It focuses on companies that have at least 50% of their business in the real estate space.

In addition, the fund stands out on targeting an internal rate of return of at least 20%. Investors can purchase shares of the fund directly from Reel Shares or through a financial intermediary. After the initial investment, shares can be traded on the NYSE.

To purchase shares of ReelShares Real Estate Focus Fund directly from ReelShares, register on the ReelShares website at https://reelshares.com

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