After 10 short-term rate increases to attempt to achieve its dual mandate of full employment and price stability, economic conditions suggest the Federal Reserve may pause rate activity in the coming months.
Zonda chief economist Ali Wolf says the job market has experienced four months of “pretty strong” growth and inflation has continued “moving in the right direction,” suggesting that no further interest rate increases may be necessary in the short term as the economy adjusts to the changes in monetary policy.
“The Federal Reserve is trying to figure out what the right kind of policy is today. And different sectors will be hit at different points, and that’s what makes trying to figure out what the right amount of policy that is needed quite difficult,” Wolf said during Zonda’s most recent National Housing Market Update webinar. “The Federal Reserve has communicated that a pause is more likely. But any surprise to the positive may encourage the Federal Reserve to be a little bit more aggressive.”
While uncertainty has had varying impacts on different sectors of the economy, the housing industry has largely been a beneficiary of those developments in the first four months of 2023.
“[There is] so much optimism about the housing market, and I think for now that’s because housing has become a beneficiary of economic uncertainty, [which has] resulted in lower mortgage rates,” Wolf says.
Lower mortgage rates have contributed to an increase in buyer demand during the spring selling season, and less resale inventory has allowed the new-home sector to capture a larger share of the housing market. After a strong first two months of the year, Wolf says builders have reported flatter levels of activity in March and April, though the strength of the spring selling season “is still holding up.”
“The big takeaway across most markets in the country is that we’re off [sales paces] compared to 2021, but in line with or outperforming 2019 [levels],” Wolf says. “This feels more healthy, this feels more sustainable. There are sales to be had as long as you adjusted to find the market.”
According to Zonda’s division president survey, roughly 50% of builders were lowering prices and 50% were holding prices flat at the end of 2022. In the most recent survey, Wolf says roughly 60% of respondents reported increasing prices, while 40% reported holding prices flat. While starts paces are down compared with the same period in 2022, senior managing principal Tim Sullivan says construction timelines have begun to improve for builders.
“When we were looking just a few months ago, typically the time frame to complete a home was between eight and 15 months, or more,” Sullivan says. “But now it’s back down to four to seven months, which is a positive element. Because from that standpoint, it’s getting back to a more reasonable time frame for us to bring product to market.”
While construction timelines and the supply chain are improving, Sullivan says builders are reporting delays related to permitting, government services, and prohibitive land costs.
“In April, we had almost 20% of [builder] respondents say land prices are moving up, and we didn’t see that in previous months. We didn't see that in the first part of the month [of April],” Sullivan says. “I think it’s a response to the strong selling season we’ve seen this spring.”
Generational Differences
During the webinar, Wolf highlighted the differences in preferences, behaviors, and activity across generations from baby boomers to the Gen Z cohort.
Wolf says baby boomers—defined as individuals between the ages of 60 and 79—represent the most important part of the economy, controlling 50% of the nation’s wealth, and will become an increasingly important cohort for home builders as all boomers will reach retirement age by 2030. In addition to having the highest homeownership rate, the 65-plus age cohort also has experienced an increase in equity through home price appreciation. Data from United Van Lines suggest baby boomers moved more than any other age group in 2022, and data from the National Association of Realtors indicates boomers overtook millennials as the most active home purchasing cohort in 2022.
“When you think about what this cohort wants, not everyone will want age-restricted or age-targeted [communities],” Wolf says. “There’s a pretty clear overlap between the price that works [and] the size that works with those that are moving down [like boomers] versus those that are entry level.”
The Gen X cohort—defined by Wolf as individuals between the ages of 40 and 59—represent an opportunity for builders, as Wolf says the most active shoppers in the current market are move-up buyers. Gen Xers have the second-highest homeownership rate. While baby boomer homeowners are more likely to be move-down shoppers, Wolf says Gen X homeowners are more likely to be in the move-up category, searching for high-quality neighborhoods, locations with convenience to job centers, and overall affordability.
Wolf says millennials, the largest living generation, represent a “massive opportunity” for builders in both the entry-level and move-up categories.
“When you look at the top priorities for millennials, we see that those that don't have kids value convenience, access to restaurants, shops, walkability, distance to work. Those that do have kids focus heavily on schools and safety,” Wolf says.
Wolf says that while Gen Z buyers were not even a part of the home buying market as recently as 2017, the cohort is set to become an increasingly important part of the housing landscape in the short-term future. Wolf says Gen Z buyers represented 9% of the overall housing market in 2022.
“As we look at Gen Z, 70% right now are saving money, and 60% are intentionally saving money for their first home,” Wolf says. “Nearly 45% of Gen Zers are looking to purchase their home in the next five years, but they’re facing some of the same challenges that we’re seeing with other groups: not having enough savings for a down payment, not knowing where to begin, and finding a home within their price range.”