Market dynamics at the end of 2023 have set the stage for continued positive momentum in the housing market in the coming year, led by the new-home market.
“We anticipate 1.3 million total housing starts in 2024, led by the single-family market. Builders anticipate starting more homes this year compared to last year as more lot supply comes online and the funneling effect continues to push people into the new-home market,” says Zonda chief economist Ali Wolf.
Zonda is projecting single-family starts growth of 2% on a year-over-year basis in 2024 to approximately 950,000. The NAHB has a similar projection, anticipating starts will increase between 3% and 4% in 2024.
NAHB chief economist Rob Dietz says the estimate is “conservative” but reflects results from recent Housing Market Index reports that have shown weakness, particularly related to future sales expectations.
Lawrence Yun, chief economist and senior vice president of research for the National Association of Relators (NAR), projects 1.48 million total housing starts in 2024, including 1.04 million single-family starts.
New-home sales are also projected to experience positive growth in 2024, with builders continuing to benefit from the impact of the lock-in effect and the benefits of rate buydowns and incentives for prospective buyers.
“While we think home sales will start to rise over the new year, the combination of modest increases in home prices and still-elevated interest rates suggest a slow pace of recovery from previously recessionary levels of housing activity,” says Fannie Mae chief economist and senior vice president Doug Duncan.
Yun projects a jump in new-home sales of 19% in 2024 on a year-over-year basis.
Fannie Mae says the new-home sector is also benefiting from lower material costs and an improving supply chain.
“A key risk here [for builders] is that consumers become skittish again,” Wolf says. “While builders are optimistic today, if sales don’t meet expectations, builders will be less eager to keep building.”
While interest rates have come down significantly from the 8% levels seen in October, Wolf says affordability is still a major hurdle for prospective home buyers, and the “tale of two housing markets” seen last year is likely to continue in 2024. She says builders will continue to work with consumers on a case-by-case basis to help buyers in the first-time, move-up, or move-down categories.
For Dietz, as interest rates lower, the gap between current market rates and rates of a homeowner thinking of selling will continue to close, potentially reactivating the resale market.
“As interest rates settle lower, more inventory from existing homeowners will come onto the market. And as that inventory comes in, [coupled with] mortgage rates coming lower, we are expecting gains for the pace of existing sales as well,” Dietz says. “We’ve had two years of fairly significant declines. We’re looking for a small gain in the pace of resale single-family sales [in 2024].”
Wolf says the potential reactivation in the resale market may mean builders lose some of their market share advantage gained in 2023, but it is not necessarily bad news for builders.
“We don’t view any uptick in [resale] supply as necessarily a bad thing unless it is led by investors offloading properties,” Wolf says. “If relatively lower rates result in primary buyers more willing to sell, that could be a good thing for the overall housing market—more mobility, more sales—and the wider economy. Housing typically leads the business cycle on the way up and down.”
The NAR projects existing-home sales will increase 13.5% on a year-over-year basis to 4.71 million in 2024.
“Metro markets in Southern states will likely outperform others due to faster job increases, while markets in the Midwest will experience gains from being in the most affordable region,” Yun says.
While the outlook is positive for the new- and existing-home markets, economists forecast an ongoing slowing in the multifamily segment. The NAHB believes tightening finance conditions and the approximately 1 million units already under construction will contribute to a 20% decline in multifamily starts in 2024.
Zonda anticipates starts in the multifamily segment will be down 26% on a year-over-year basis.
“The divergence between the [single-family and multifamily] sectors comes down to credit availability and the anticipated imbalance between supply and demand,” Wolf says. “There are many metros across the country where multifamily supply is expected to spike following a record level of starts seen over the past few years. These deliveries should remain elevated in 2024, but until it is clear the impact on rent growth and occupancy rates, many new projects are on hold.”
Fed Expectations
The decline of inflation from annualized levels near 9% in the middle of 2022 contributed in part to the Federal Reserve electing to pause on rate activity for its final three meetings of 2023. In its final meeting of the year, the Fed indicated three rate cuts are possible in 2024.
“The gravity of the cuts will be determined by the state of the economy. For example, if the Fed feels like a soft landing is secured and they no longer need to have restrictive policy, the cuts may be mild at 25 basis points. If they become nervous a mild recession is forthcoming, we could see bigger cuts,” Wolf says. “For those hoping the Federal Reserve slashes rates, be careful what you wish for. If the Fed finds themselves in a place that they need to dramatically lower mortgage rates, it wouldn’t be for a good reason.”
Yun forecasts there will be four cuts in 2024, Wolf anticipates two to three rate cuts, while the NAHB is projecting two in the calendar year.
“From a macro perspective, the Consumer Price Index (CPI) data is going to be critical to ensure that effectively the Federal Reserve is done tightening. Ultimately, by the second half of next year we could see two or three rate cuts. We’ve got two in our forecast,” says Dietz. “That’s all going to be dependent on the inflation data. If the CPI and the core Personal Consumption Expenditure measure of inflation come closer to the Fed’s 2% target, then we will be on pace for normalized cuts to maintain restrictive policy.”
Fannie Mae anticipates a modest downturn in the economy in 2024, noting the underlying business cycle dynamics that contributed to the call for a recession in 2023 remain. The group says while the likelihood of a soft landing has improved, the task remains difficult for the Fed.
Yun says he believes GDP will grow by 1.5% in 2024, helping avoid a recession, but projects net new job additions will slow to 1.7 million this year, compared with 2.7 million in 2023 and 4.8 million in 2022.
“Clearly, the many economic forecasters who previously forecasted a recession beginning in 2023 were wrong, including us,” Duncan says. “However, we continue to think there are reasons for concern that will likely lead to a mild economic downturn, including stretched consumer spending relative to personal incomes and the continued effects of restrictive monetary policy still working through the economy.”
