Builders look to capitalize on cautiously optimistic U.S. housing market forecast

The housing market has endured a wild ride over the past two years. As mortgage rates began to soar in 2022, the pandemic-induced market frenzy came to an abrupt end, even causing concerns of significant price corrections and a deep housing recession. Aspiring buyers were pushed to the sidelines as mortgage rates reached their highest levels in over 20 years, making monthly mortgage payments unaffordable for many. Meanwhile, existing homeowners grew reluctant to sell, as they opted to maintain their existing low rates, pushing resale inventory levels to record lows.

The nearly overnight shift in the housing market caused builder sentiment to plummet, reaching the lowest point since 2012 outside of the start of the pandemic, with the National Association of Home Builders Housing Market Index (HMI)—a gauge of builder opinion on the relative levels of current and future single-family home sales measured on an index from zero to 100, with anything above 50 being positive and below 50 being negative—was at 31 in December 2022. However, the lack of resale inventory, coupled with continued demand from less price-sensitive buyers and those who had missed out due to competition, helped maintain resiliency in home prices, which recovered quickly from initial drops. 

Buyers have faced a challenging housing market, defined by limited inventory and unaffordability. However, hope is on the horizon. Last year closed on a positive note, with mortgage rates easing from their recent highs and builder sentiment as measured by the HMI improving, albeit still in negative territory—ending the year at 37. While some uncertainty over inflation remains, the worst of inflation appears to be behind us, peaking at 9.1% in June of 2022, and sitting at 3.1% for the 12 months ended January 2024. The Federal Reserve is forecasting a soft landing and has indicated it intends to reduce its policy rate by at least 75 basis points in 2024 to support the expanding economy.

Disinflation and expectations of future rate cuts by the Fed have led to less uncertainty in the market, reflected in the easing of mortgage rates. Mortgage rates should decline further this year, likely reaching the low 6% range by the end of the year, providing some relief to buyers and improving sales, which have faced a stark decrease over the past two years. Annualized new home sales climbed 4.4% during 2023, while existing home sales dropped 6.2% during the same period. 

While affordability will continue to constrain home sales, an easing in rates is certain to bring back some of the pent-up demand as buyers become more willing to purchase a home at a rate in the 6% range versus the nearly 8% rates reached in 2023.

We expect that higher demand from buyers will also fuel new home construction, which has begun to recover but remains below our calculated equilibrium of 1.67 million units—the annual units needed through 2030 to close the housing shortage in the United States.