The article below was written by Dr. Robert Dietz, National Home Builders Association Chief Economist.
With the Federal Reserve expected to cut short-term interest rates at the conclusion of its upcoming September monetary policy meeting, long-term interest rates have already priced in some of the impact of future easing. The average 30-year fixed-rate mortgage last week was 6.35% — the lowest since May 2023. As interest rates gradually and unevenly move lower in the quarters ahead, housing demand will improve in most markets and opportunities will expand for prospective home buyers currently waiting on the sidelines.
Home sales have picked up as long-term interest rates trend lower. Total existing home sales increased 1.3% to an annual rate of 3.95 million in July. This was the first monthly gain in four months, although the pace of sales is still down 2.5% from a year ago. Inventory remains lean at just a 4-month supply, although inventory levels are rising (up 19.1% on a year-over-year basis).
New home sales surprisingly increased 10.6% in July to an annual rate of 739,000, elevating the pace of sales 5.6% from a year ago. However, this gain was at odds with recent industry surveys, suggesting a downward revision is likely for the July data.
New home inventory stands at 462,000 homes, down 1.1% from June but at a seemingly elevated 7.5-month supply. However, the combined inventory of both new and existing homes stands at a low 4.5-month supply. As this metric rises, the pace of home price gains will continue to slow. The Case Shiller Home Price Index has been trending downward for several months, declining from an annual rate of 9.76% in August 2023 to 1.89% in June 2024.
New research from NAHB examined several of the challenges home builders faced in recent years. For example, analysis of 2023 data found that it takes an average of 8.6 months to build a single-family home, up from 7.2 in 2015. Additional analysis explains why cost is a key barrier to adding entry-level housing. The data show that the median cost per square foot rises significantly as homes get smaller: from $132 per square foot for a home over 5,000 square feet, to $200 per square foot for a home under 1,200 square feet.
And new labor market analysis finds that the share of white-collar workers in the construction industry is on the rise, while the share of trades workers has fallen from 71% in 2005 to 61% in 2022. Some view this as an indication of technology adoption. However, lackluster productivity gains for the sector during this period suggest the rising presence of white-collar workers is a result of the industry’s ever-expanding regulatory environment.
