The article below was written by Dr. Robert Dietz, National Home Builders Association Chief Economist.
With the election in the rearview mirror, and personnel and policy decisions coming into focus for the incoming Trump administration, markets absorbed inflation data and elevated future risks. Inflation, which was a critical issue during the election, ticked higher in October as the Consumer Price Index (CPI) posted a 2.6% year-over-year growth rate. Overall, prices since the start of 2020 are up 20.2% — the largest spate of inflation in almost five decades. Due to higher construction costs and other supply-side factors, housing sector inflation continues to be a driving factor for the CPI. Shelter inflation increased at a 4.9% year-over-year rate in October and was responsible for 65% of total inflation over the last 12 months.
Due to lingering inflation pressure and possible future policy risks for prices, long-term interest rates remain elevated even as the Fed reduces short-term rates. The 10-year Treasury is near 4.4% — the highest level since the start of July. Fiscal policymakers need to show they will exert discipline for the federal deficit if risk increases. The 30-year fixed-rate mortgage is above 6.8% — also the highest rate since July due to similar concerns. NAHB’s forecast is for future declines in these interest rates over the next two years.
Ongoing elevated mortgage rates, combined with higher home prices, leave housing affordability in crisis-level conditions. The NAHB/Wells Fargo Cost of Housing Index (CHI) indicates that for the typical family, 38% of their income is required to buy a median-priced new or existing home. Low-income families would require three-quarters of their income. These affordability conditions are holding back home sales volume, although existing home sales improved in October. For the month, resales increased 3.4% to a 3.96 million annual rate — up 2.9% from a year ago and the first year-over-year gain for transaction volume in three years. Total inventory remains lean at a 4.2-month supply.
The November reading of builder sentiment, via the NAHB/Wells Fargo Housing Market Index (HMI), noted a post-election gain despite ongoing challenges for affordability and home construction costs. The HMI increased by three points to a still soft reading of 46. However, the measure of future sales expectations increased by seven points to a positive reading of 64, reflecting builders’ optimism for the economy and sales conditions, while mindful of current policy risks. For example, single-family construction starts were down 6.9% to a 970,000 seasonally adjusted annual rate in October, although on a year-to-date basis, single-family home building is up more than 9%. Multifamily construction is down 29% on a year-to-date basis, as that market continues to face localized oversupply and tight financing conditions. NAHB is forecasting a small gain for single-family construction in 2025, while apartment development will level off later in the year.
