An improvement in housing demand in the early months of 2023 has translated to a healthy start to the spring selling season.
However, continued elevated levels of inflation and the efforts to cool the economy by the Federal Reserve provide uncertainty around the labor market, mortgage rates, and demand in the coming months.
With an excess of data coloring the economic picture, economists from Zonda, the NAHB, and the National Association of Realtors (NAR) shared the indicators and trends to watch this spring to help understand the health and stability of the housing market and the overall economy.
Inflation, Jobs, and Affordability
Zonda chief economist Ali Wolf says labor market and inflation data are the “two biggest indicators” to watch in the coming months. Inflation has remained at levels well above the Federal Reserve’s target of 2% but has shown signs it may be past its peak, while the labor market has remained strong despite nine short-term rate hikes to the Federal Funds rate.
Ideally, cooling inflation and a labor market that does not “crash” will help provide stability in the economy and give confidence to builders and buyers, according to Wolf and NAR deputy chief economist and vice president of research Jessica Lautz.
“In housing, stability is key. Stability allows builders to feel comfortable starting new homes, and stability allows consumers to feel comfortable making the largest purchase of their life,” Wolf says. “If we see a notable cooling in the labor market and inflation, it should provide more mortgage rate stability.”
Mortgage rate stability would benefit affordability and potentially allow more first-time buyers to enter the market. In recent months, Lautz says the share of all-cash buyers has remained at an elevated level, representing 28% of all existing-home sales in February, a concern for rate-sensitive buyers.
“If we see a lot of competition in the spring market with potentially home buyers who cannot pay all cash, then we might see a smaller share of first-time home buyers being able to enter the market,” Lautz says.
10-Year Treasury Bond
For NAHB chief economist Robert Dietz, no indicator embodies more data and information than the 10-year treasury bond. The 10-year treasury can provide builders insight on both the current economy as well as investor expectations for the economy. For instance, the 10-year treasury bond recently falling from 4% to below 3.5% is “a fairly big move” that suggests economic weakening is on the horizon, he says.
This will provide a challenge for builders, Dietz says, as the housing sector will be in recovery mode while other sectors in the economy experience cyclical downturns.
“What [the 10-year treasury] is telling us is that investors are seeking bonds, which means they are expecting macro conditions for the rest of the economy to weaken,” Dietz says. “That typically tends to happen in the middle to the late part of business cycles. Single-family home building is a leading sector and will benefit from those lower interest rates that are more of a caution sign for the overall economy, but probably indicate the home building sector is moving closer to recovery mode.”
Existing vs. New Home Inventory
The mortgage rate roller coaster of the past several years has resulted in one positive development for builders: less resale listing inventory and greater market share for new construction. Historically, new homes have represented between 10% to 15% of the total housing inventory. However, with homeowners locked in at rates much lower than those available currently and reluctant to sell, builders represent roughly 30% of the market.
“We have been watching to see if sellers would try to ‘time the market’ by selling during the spring selling season or hold off on listing,” Wolf says. “For now, it seems many existing homeowners are choosing not to sell. Some of the resale homes on the market today are unappealing and priced high. Builders are offering a turnkey product at a mostly competitive price.”
Even if homeowners are moving, Dietz says they are “much more” likely to rent out their home to keep the lower mortgage rates, especially if they are moving within a metro market.
Lautz says homeowners facing moving decisions are increasingly stalling the decision to list their homes and enter the market due to concerns over higher interest rates.
“That lock-in rate is depressing the amount of existing-home inventory, it’s increasing the size of the single-family rental stock, and it’s increasing demand for new construction,” Dietz says.
Supply Side Caution
Dietz says the tightening lending environment likely to emerge in the aftermath of the Silicon Valley Bank collapse is a concern for private firms relying on capital from regional and community banks.
“If the lending tightens up, that’s going to make one of our long-term supply side issues more challenging. It means the lot development pipeline is going to get squeezed,” Dietz says. “As we enter into the rebound mode, unfortunately that means some of these supply side concerns that have eased somewhat due to the lessening of home building activity are going to come back.”
He says watching supply side costs will be important in the coming months for builders. The availability of lot supply will be important to track as it relates to land and lot prices heading into a market rebound. Managing labor at a time when permitting activity is decreasing and housing starts soften will also play a role in builders’ ability to navigate the expected economic downturn and recovery periods.
“I think most builders expect this to be a relatively short and sharp downturn, so to a certain extent you’re holding onto labor in expectation of that rebound,” Dietz says. “Make sure your subcontractors and your own employees are available for expansion [after] these cyclical lows.”