Posted on February 21, 2024 by Mike Means

The following article was written by Robert Dietz, Chief Economist at the National Association of Home Builders.

The economy continues to post solid gains, leading the bond market to reverse earlier bets that the Federal Reserve would begin cutting the benchmark federal funds interest rate as early as March. Better-than-expected economic performance will reduce the rate of improvement for inflation data, meaning the Fed will need to maintain its long-stated monetary policy of higher rates for longer. In January, the Consumer Price Index increased by 3.1%, following a 3.4% increase in December. 

Improved expectations for macroeconomic conditions led the 10-year Treasury to test a 4.3% rate this week, after starting the year just below 3.8%. This has led the 30-year fixed-rate mortgage to rise, albeit by a smaller amount, from 6.6% to approximately 6.8% over the same period. Nonetheless, the NAHB forecast continues to call for mortgage rates to move moderately lower over the course of 2024 and 2025 before settling in the high-5% range. 

Ongoing elevated interest rates left the NAHB/Wells Fargo Housing Opportunity Index (HOI) at a 37.7 reading, meaning only 37.7% of new and existing home sales during the fourth quarter of 2023 were affordable for a median-income household. (This was the final edition of the HOI, which will be replaced in May by a new affordability index: the Cost of Housing Index.) The final read of the HOI was near a multi-decade low for housing affordability because of both high interest rates and limited housing inventory.

Despite the recent uptick for interest rates, a combination of several key factors — including expectations that mortgage rates will continue to moderate in the coming months, the prospect of future rate cuts by the Federal Reserve later this year, and a protracted lack of existing inventory — provided a boost to builder sentiment for the third straight month. Builder confidence in the market for newly built single-family homes climbed four points to 48 in February, according to the NAHB/Wells Fargo Housing Market Index. This is the highest level since August 2023, and it suggests gains for single-family starts ahead.

January construction data suggest competing directions for multifamily and single-family construction volume in 2024. For the first month of the year, single-family construction starts decreased 4.7% to an annual rate of 1 million. However, single-family starts are up 22% compared to a year ago, and single-family permits have increased 1.6% to an annual rate of 1.02 million — the highest since May 2022. Meanwhile, multifamily construction starts decreased 35.6% to an annualized 327,000 pace in January, and multifamily permits decreased 7.9% to an annualized 455,000 pace — their lowest since April 2020.

Residential building material costs may heat up in 2024 as single-family construction volume increases. The latest Producer Price Index indicated that prices of residential building materials increased 1.28% between December 2023 and January 2024. This was the largest monthly change for the index since March 2022.

Finally, new data indicate that the long-run demand for home construction may be larger than many analysts expect. The Congressional Budget Office released new 30-year population growth projections that include substantial upward revisions. The latest estimates include an additional 8.9 million people in 2053, a 2.4% increase from its previous forecast. A faster growing population will undoubtedly increase demand for housing (including both for-sale and for-rent multifamily and single-family), creating added pressure on the persistently underbuilt housing market.

Robert Dietz
NAHB Chief Economist

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