For home builders, the first several months of 2024 have brought a return to more historic seasonal norms, with January and February sales levels in line with expectations. Many builders have projected a “good, but not blockbuster,” 2024, according to Zonda chief economist Ali Wolf.
To help parse through the myriad trends, developments, and data points, economists from Zonda, the NAHB, the National Association of Realtors (NAR), Fannie Mae, and the Mortgage Bankers Association (MBA) spoke with BUILDER to share the most important factors impacting housing and the overall economy as well as developments to track as the spring months arrive.
Regional Trends and Surprises
Optimism for a strong year in the housing market has been tempered by persistent elevated mortgage rates, which likely will sideline many consumers who may have been active in the market. Despite rate headwinds, NAHB chief economist Rob Dietz says 2024 is still projected to be a year of gains for both new-home sales and single-family housing starts.
“Inventory, in addition to rates, is still a very big factor [for housing activity],” says Joel Kan, vice president and deputy chief economist for the MBA. “Shifting inventory is still dominating in terms of what is holding housing activity back. We know there is demand even with rates at their current levels.”
While the general overall housing market is one that is “slightly overperforming,” according to the Zonda Market Ranking, Wolf says the housing picture remains locally driven.
“The housing market is really hard to describe in a blanket statement today,” she says. “The relative strength and weakness come down to the metro, the submarket, the community, the product, and the builder.”
At the end of 2022 and the beginning of 2023, a “clear” East/West divide had emerged in the housing market, where home sales in the Eastern region of the country held up better than the West. However, Wolf says, by the spring selling season of 2023, that divide “had diminished, and we saw solid sales across the country again.”
“Zonda data through February, the latest available, shows the return of the East/West divide,” Wolf says. “We attribute this to the relative affordability of the Midwest and Southeast compared to the Southwest and Mountain West.”
In the existing-home market, Jessica Lautz, deputy chief economist and vice president of research at the NAR, says the Midwest remains more affordable than other markets in the country, while the West remains “really expensive” and “out of reach” for many Americans.
Doug Duncan, senior vice president and chief economist at Fannie Mae, notes the data indicates migration is still occurring from high-cost locations to lower-cost areas.
“Part of that is aided and abetted by the work-from-home permissions that businesses have given people,” Duncan says. “We are watching whether or not businesses change their view and require more time in the office, which could potentially reverse some of the decisions that have been made in terms of regional migration.”
Kan says data from MBA’s Weekly Application Survey is showing lower activity level than last year’s pace, though activity in the Builder Application Survey has been showing year-over-year gains “for the past few months.”
“It depends on the data point you pick to gauge where the housing market is. Our forecast is still gradual growth in existing homes over the year—6%—and [more significant growth for] new-home sales—14%,” Kan says. “On the new side, it’s as expected; on the existing side, it is maybe slower than expected [thus far in 2024].”
Jobs, Inflation, and the Fed
With their influence on the policy actions of the Federal Reserve, inflation and the labor market remain two of the most significant areas to track in the overall economy. The Fed has elected to hold rates steady at its previous five meetings, dating back to 2023. In its most recent decision from March, the Fed said while job growth has remained strong, unemployment has remained low, and inflation has eased, the “risks” to achieving its employment and inflation goals “are moving into better balance.”
Duncan says while there were concerns about the private sector beyond government and health care industries as it relates to employment, the private sector “really picked up” in December and “was gangbusters” in the most recent jobs report in March.
Following the March jobs report, where the U.S. Bureau of Labor Statistics reported the economy added 303,000 jobs with an unemployment rate of 3.8%, Wolf notes the continued “higher-than-expected reads” on both inflation and the labor market means short-term rate cuts from the Fed “are still a ways off.”
“Traders expected the Fed to cut rates many times this year because they thought the officials would deem their current policy level too restrictive,” Wolf says. “In reality, we had stronger-than-expected inflation reads and jobs data this year.”
Similarly to the labor market, inflation was also stronger than expected in March, growing 0.4% month over month and 3.5% on annual basis, well above the Fed’s stated goal of 2%.
“If inflation does not calm down to the Fed’s targets, then rates are going to stay higher,” Duncan says. “It’s not inconceivable that another month or two of increased inflation could reverse the Fed’s view that they would have to tighten further. That’s not currently in the forecast [though].”
Wolf affirms Zonda’s projection of two rate cuts, both likely to take place in the second half of the year. Dietz says the NAHB is also still calling for two rate cuts, one in the third quarter and one in the fourth quarter. Kan says the MBA’s baseline forecast remains a rate cut in the second quarter of the year, followed by two more rate cuts in 2024, while Duncan says Fannie Mae is also still forecasting three rate cutes, but it is revisiting revising the organization’s forecast.
“The Fed’s reluctance to move into an easing cycle is being brought on by data that is not terrible. It is fairly strong macroeconomic data that is good for rental demand, good for owner-occupied demand, but it does represent an inflation risk,” Dietz says.
Wolf says Fed rate cuts remain of significant importance to the housing market because financial markets move ahead of policy changes.
“Three to six months before the Fed cuts rates, mortgage rates have already trended down, helping with housing affordability,” Wolf says.
Mortgage Rates and Housing Inventory
Mortgage rates remain a linchpin for the housing market. Rates have stabilized at elevated rates in the early months of 2024, cooling some of the optimism the housing market carried into the calendar year.
“Our forecast right now is for mortgage rates to come closer to 6% between now and the end of the year,” Kan says. “It’s not going to be a smooth, straight line down to 6%.”
For Wolf, the most important indicator to gauge the health of the housing market remains housing supply, particularly as the new-home segment has captured market share from the resale market.
“Existing-home supply every month this year has come in at the highest level since 2020,” Wolf says. “Most markets still have a notable drop compared to pre-pandemic, but the directional trend is worth watching.”
Lautz says while the marketplace is seeing “slightly more inventory” on a year-over-year basis, the overall levels remain “very low.”
“We are seeing prices continue to go up as well [on the resale side],” Lautz says. “They were up 5.7% [in February], that’s eight consecutive months of year-over-year home price gains. As we look at home prices coming up, it is really due to the lack of inventory and demand outpacing the inventory that we currently have.”
Duncan says existing-home inventory relief is also unlikely to come from aging households moving from their current residences. According to survey data from Fannie Mae, a majority of homeowners 60 or older are planning to age in place. Just 17% of those surveyed had sold their homes, but most also bought another home to be closer to family.
“If you’re looking for the existing-home supply to be solved by the boomers, it’s probably not going to happen,” he says.
Consumer Confidence
While the overall economy has remained resilient, Kan and Dietz both say a few consumer data series, including credit card debt and auto loans, should present some caution about consumer confidence and spending in the near-term future.
“We are still adding lots of jobs, [job] openings are still high, wage growth is still high. But there are signs that there are strains, especially in the consumer sector of the economy,” Kan says. “Credit card debt is now $1 trillion in total balances. Credit card and auto loan delinquencies are increasing. It may be an uneven impact across households, but, at the same time, those are signs that there may be a more significant slowdown in consumer spending over the near term.”
Dietz says auto loan debt has also doubled over the past decade. In conversations with builders and remodelers, Dietz says he cautions that headlines about rising delinquency rates or outright failures to pay on auto loans is “an early-warning radar on consumer confidence and consumer spending power weakening.”
Duncan says the data suggests lower-income households are “running up balances of credit cards and rolling those balances over, which is usually a sign of stress.”
“The whole population and the whole workforce is not in the same place,” he says.
Dietz and Lautz agree that such a slowdown in consumer spending may not impact durable goods, such as housing, as much as discretionary consumer spending.
“Housing consumers, overall, have higher incomes and seem to be wealthier than they have been in past years,” Lautz says. “I think we have to keep in mind that a third of the market is able to pay all cash for a home today because of the housing equity they have earned. So, while there are concerns in the market, they may be more for first-time home buyers than repeat buyers.”
Lots, Labor, and Material Costs
On the supply side, Dietz says concerns over land and lots are materializing already for builders. Lot availability moved into second place among expected concerns among builders in 2024, behind the labor shortage.
“[Lot concerns are] going to have a lagged effect in terms of the actual availability. I think later this year [and] the start of 2025 [will be] when actual lots on hand are [going to get] relatively tighter in terms of supply relative to the current need for construction,” Dietz says.
In regard to the labor shortage, Dietz says in the second half of 2023 some of the improvement in the labor market “reversed itself.” The sector is now faced with a rising level of open, unfilled jobs amid an environment where many companies are planning to ramp up construction activity levels.
“My expectation is the labor shortage is going to get worse during the remainder of 2024,” Dietz says.
While lumber prices stabilized during 2023, Dietz says he continues to warn builders about lumber in his discussions with associations and companies across the country. The Softwood Lumber Agreement with Canada remains a key priority issue for the NAHB, and Dietz says efforts need to be taken to improve the domestic production of lumber, which is used to frame approximately 90% of the single-family homes built in the United States.
“The warning I’ve been giving builders is that we have not fixed the fundamental frictions in the lumber market,” Dietz says. “We do not produce enough lumber domestically, so we need to work with the domestic lumber industry to find what kind of policies and regulatory concerns they have in order to increase the capacity of the U.S. softwood domestic industry.”
