The article below was written by Dr. Robert Dietz, National Home Builders Association Chief Economist.
Despite ongoing easing of short-term interest rates by the Federal Reserve, long-term interest rates remain in the same range they have been in for the last two years. Frustratingly, the 10-year Treasury rate began the week at 4.6%, about 100 basis points above NAHB's forecast from a year ago. With the average 30-year fixed-rate mortgage now near 6.9%, interest rates for home buyers are back to levels from last July but remain below October 2023 cycle peaks.
The rise in long-term rates has been driven by bond market concerns rather than monetary policy. After cutting the federal funds rate by 25 basis points in December, the Fed's policy rate target is now 75 basis points off the cycle high. Long-term interest rates have been driven higher because of improved economic growth prospects (a positive) as well as concerns over tariffs, a tight labor market and a potential increase to the federal deficit — all post-election changes for the economic outlook. Indeed, the Fed is projecting just two rate cuts for 2025, compared to earlier projections of four rate cuts, with a terminal rate for this cycle at 3.25% in 2026. The central bank also lifted its inflation forecast for 2025 to 2.5% (up from 2.1%), reflecting an even slower path back to its inflation target of 2.0%.
Amid these financial challenges, builder sentiment in December, as measured by the NAHB/HMI Housing Market Index (HMI), held steady at a level of 46. Nonetheless, builders remain confident that the positive factors of the outlook, including expectations for an improved regulatory environment and faster economic growth, will help spur the industry in 2025. As a reflection of that sentiment, the future sales component of the HMI increased three points in December — the highest reading since April 2022.
In November, single-family starts increased to a 1.01 million annual rate, rising 6.4% from the month prior and up 7.2% on a year-to-date basis. Multifamily construction slowed 23% in November to a 278,000 annual rate, with apartment construction on a path to be down almost 30% for the 2024 data.
In addition to elevated interest rates and a multi-decade low for housing affordability, inventory is rising and becoming a concern in some local markets. However, on a national level, inventory remains below historical norms. The 8.9-month supply of new construction combined with a 3.8-month supply for single-family resale homes yields a still-low total of a 4.5-month supply of all for-sale housing. While inventory is expected to rise in 2025, solid economic growth and a positive labor market should support demand for housing.
