The shifting housing market presents opportunities for builders

The U.S. housing market started 2024 with optimism, as builder sentiment recovered from the 2023 near-record lows and mortgage rates eased, starting the year below 7% for 30-year fixed conventional loans. The undersupply of homes, due to limited construction following the global financial crisis of 2007−09, was exacerbated by the lack of resale inventory. Current homeowners opted to keep their locked-in, low-interest-rate mortgages, which made room for new home construction to attract buyers through rate buy-downs and other incentives.

However, optimism waned as aspiring buyers were priced out amid both rising interest rates and home prices. Home construction remained tame as builders managed their inventory by building only a sufficient number of homes to meet subdued demand.

Residential construction is limited as affordability challenges persist

Through ups and downs, residential construction in recent months has remained limited. July 2024 residential starts and permits were down 16%, and 7%, respectively, from July 2023, according to the U.S. Census Bureau. Single-family home construction, while outpacing multifamily and showing some recovery from 2023, remains soft; July 2024 permits were down 1.6% from a year earlier, and starts were down 14.8% during the same period.

Despite a substantial need for U.S. housing, with the U.S. housing shortage estimated to exceed 3.5 million units, limited demand due to affordability challenges has caused homebuilders to limit construction of new homes, further exacerbating the housing shortage.

Home prices and rents are up 26% and 47%, respectively, since 2020, according to The State of the Nation’s Housing 2024, a report by the Harvard University Joint Center for Housing Studies. In fact, in July 2024, the median existing-home sales price soared to $419,300, an all-time high, while the median sales price for a new home was $417,400. Despite the higher prices, all-cash transactions have increased to represent 28% of home sales, likely the result of higher interest rates making it more expensive to borrow money. Rates have more than doubled the record lows of the pandemic era. (A 30-year conventional fixed-rate mortgage hit a record low of 2.65% in January 2021.)

Affordability for those looking to finance a home under the current interest rates has plummeted, making it nearly impossible for the average American to enter the market. This is a problem, because first-time purchasers account for nearly a third of all home sales.

In May 2024, the National Association of Home Builders and Wells Fargo released a Cost of Housing Index, which showed that 38% of a typical family’s income is needed to make a mortgage payment on a median-priced, new, single-family home in the United States. 

By all indications, something’s gotta give

Current market conditions have created favorable conditions for homebuilders. There is a continued shortage of inventory and favorable demographics as millennials reach prime homebuying age. In addition, prices for certain residential construction building materials have eased from pandemic-driven highs amid supply issues. 

Most notably, lumber prices have softened considerably, with random lengths framing lumber composite prices down 7.6% through Aug. 16, compared to a year ago. Other materials, including paint, steel pipe and tube, and steel mill products, are also down considerably year over year. Building material price inflation and pandemic-induced supply shortages were significant factors in limiting housing construction over the pandemic period and driving up housing prices. While material price inflation remains, the easing in some material prices will bode well for builders.

The outlook

As we look ahead on the housing market, the most pressing issue will continue to be affordability, though it cannot be solved overnight. While some of the affordability challenges will ease as rates continue to fall and stabilize, builders must strategize to better position themselves and take full advantage of the opportunities provided by changing demographics and continued demand. Strategies that builders can pursue include:

• Consider increasing more affordable housing options, such as innovative layouts that provide more with less space, modular housing or homesites in lower-cost suburban and rural areas.
• Take advantage of lower material costs and pass those costs to consumers to help offset the impact of higher rates.
• Increase investments in technology to help streamline the home buying and selling process, reduce overhead costs, and build modular homes and 3D printed homes more efficiently.
• Focus on communities, taking advantage of shared spaces that families can find valuable while reducing the need for larger backyards, in order to do “more with less.”

Incorporating these strategies can help builders continue to weather the storm while providing a much-needed narrowing of the U.S. housing gap.