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

ARTICLE | February 29, 2024

Authored by RSM US LLP

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.

Relief on the horizon

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.

All eyes on the new home market

On the existing home market, reluctance by owners to sell or trade up, which would involve giving up their locked-in low-rate mortgages, has kept listings anemic. Based on data from realtor.com, roughly two-thirds of outstanding mortgages are 5% or lower. As rates ease, narrowing the spread between homeowners’ locked-in rates and current rates, more will be willing to list, but the lack of resale inventory will persist, as the

New home listings make up nearly a third of total listings, compared to 10%-15% pre-pandemic, a ratio that will likely persist, as existing home listings are not expected to climb drastically.

Furthermore, as millennials, the largest demographic, continue to form households, and baby boomers opt to stay put in their homes, the shortage of homes in the U.S. will be exacerbated. Our estimates indicate a shortage of 3.5 million homes in the U.S., a direct result of underproduction in the decade that followed the global financial crisis of 2007-09, coupled with demographic shifts resulting in more net household formations.

The takeaway

Stabilization of mortgage rates will help bring back buyer demand, while a lack of resale inventory and the overall housing shortage in the U.S. will continue to push buyers into the new home market. As builders look to capitalize on opportunities brought on by the housing market, they can take actionable steps, including:

• Understand the local markets they operate in or wish to operate in and local demographics, in order to build suitable and affordable homes for their customers.
• Have a firm handle on their costs and key financial metrics to allow for optimal pricing models, materials management and home production.
• Invest in technology and automation to increase productivity and reduce costs, allowing for a more efficient homebuilding process.