While the end of the year has seen a reduction of long-term interest rates, the housing market is set to experience gains in 2024 for single-family construction and existing-home sales, according to NAHB chief economist Rob Dietz.
Dietz and the NAHB project that single-family starts will increase between 3% and 4% in 2024 to a level above 1.1 million and that a decline in interest rates will help boost existing-home inventory.
“For single-family starts for 2024, we’re expecting about a 3% to 4% growth rate. That’s a little conservative, in part because the [NAHB/Wells Fargo] Housing Market Index remains weak,” Dietz told BUILDER. “We’re still seeing lingering issues with things like the cost of home building [and] builder and land developer loans. We expect some constraints on lot availability by the end of 2024 and the beginning of 2025 because there are lags in the market. Housing demand is going to come back in before the lot development pipeline can really increase in order to make sure those lots are available.”
Additionally, a projected lowering and stabilization of mortgage rates should improve existing housing inventory and overall housing supply. Dietz says the NAHB projects mortgage interest rates to settle at an approximate level of 6.5% by the fourth quarter of 2024.
“As rates come lower, the [gap] between current market rates and the mortgage rate of a homeowner thinking about selling will close,” Dietz says. “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-home sales as well.”
After declining between 15% and 20% annually in each of the past two years, he says the NAHB is projecting “a small gain” in the pace of existing-home sales in 2024.
The NAHB believes market conditions, including tight financing conditions and approximately 1 million units under construction, will contribute to the ongoing slowing of the multifamily segment in 2024. Dietz and the NAHB project a 20% decline in multifamily starts in 2024.
The remodeling sector, an area of residential construction that has remained the most resilient, is projected to continue growing moderately in 2024 and 2025, according to Dietz. The decline in mortgage rates could encourage more cash-out refinancing, helping support a segment that already has underlying demand.
Economy and Inflation
Despite higher interest rates, the economy remained resilient through 2023. Inflation has declined to annualized levels just above 3%, a significant improvement from 9% year-over-year growth in the middle of 2022. However, inflation and the shelter index component of inflation remain key data points moving into 2024.
“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,” Dietz says. “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.”
Labor
The labor market will remain an important element of the construction economy, as the potential increase in starts pace could exacerbate the preexisting labor shortage.
“We’re short 400,000 construction workers in the industry right now. That is likely to get worse as single-family construction picks up in 2024,” Dietz says.
He highlighted the rise of artificial intelligence as an important wrinkle to the labor shortage issue. As AI develops and software can replicate tasks currently completed by humans, there is opportunity for industries dependent on human labor, such as construction, to recruit future laborers.
However, Dietz notes that recruiting new workers may help improve the labor shortage but could impact productivity.
“Productivity in home building is likely to go down before it goes up because we’re bringing in new workers. Just by consequence of being younger, they are going to be less skilled than the workers we lose to retirement.”
Long-Term Outlook
Extending the forecasting lens beyond 12 to 18 months, Dietz says 2025 through 2030 are projected to be good years for home building and a period where the industry can begin trimming the estimated housing deficit of 1.5 million homes.
However, demographic trends and government funding concerns are likely to make the 2030s more challenging, according to Dietz. Slowing population growth, fiscal challenges related to funding for Social Security and Medicare, as well as a slowdown in household formation will likely contribute to lower demand for housing in the 2030s.
