Exploring Data Trends: Housing Supply, Demand, & Market Dynamics

The housing market remains difficult to describe with a single blanket statement. In the new-home sector, a strong start to the year has given way to cooler seasonally adjusted sales in May and June. Furthermore, builder sentiment reached their lowest levels of the year in May and June according to Zonda and NAHB data, respectively. However, Zonda data still indicates the new-home market was “slightly overperforming” in its most recent monthly report. In the existing-home sector, Jessica Lautz, deputy chief economist and vice president of research at the National Association of Realtors (NAR), says home sales have been “sluggish” with prices continuing to “hit all-time highs.”

With the landscape of the housing market shifting and several important landmarks on the horizon—including the presidential election and Federal Reserve rate cuts—Builder spoke with economists from Zonda, the NAHB, and the NAR to gauge the important factors and indicators to track in the coming months.

Housing Market Pulse

In the overall economy, inflation has cooled but still remains above the Federal Reserve’s long-term target of 2%. As a result, no rate action has been taken, contributing in part to mortgage interest rates remaining at elevated levels throughout 2024. High rates, inflation, and high prices have many buyers sitting on the sidelines and is causing inventory in the resale market to remain constrained.

According to Zonda, 33% of home builders said demand was “on track with expectations” as recently as May, down from levels above 50% in the early portion of the year. The long-term outlook for the new-home market remains favorable, though, with the NAHB still projecting single-digit percent growth in housing starts in 2024 and additional growth in 2025 “as mortgage rates go down and builder and developer interest rates decline,” says NAHB chief economist Rob Dietz.

“Parts of Florida, Texas, Colorado, and Arizona are on our watch list at the moment. Higher levels of construction, worsening housing affordability, increasing resale supply, and rising homeownership costs have slowed demand,” says Zonda chief economist Ali Wolf. “In contrast, the tight resale supply in parts of the Northeast, Midwest, and California is helping the home building communities locally.”

In the existing-home market, Lautz says bidding wars, multiple offers, and homes selling above list price is commonplace, in part due to still-constrained levels of inventory. She says the spring and early summer months have been “more subdued” than historical levels in 2024 due several continuing ongoing factors, including affordability challenges, the lock-in effect, high rates, and limited supply.

“One of the things I would note is we are seeing slightly more inventory come into the market, but we are talking about an increase from all-time lows,” Lautz says. “Even with more inventory, the demand continues to outpace the housing inventory, which is what is pushing up home prices.”

In the multifamily sector, Dietz says the construction pipeline “is now shrinking” and for every unit started, approximately 1.7 units are being completed.

“With tight financing conditions for multifamily, the construction slowdown is underway,” Dietz says. “The [increased] supply of new apartments means rent growth is slowing, and slower rent growth in turn means shelter inflation is going to move lower.”

Inventory

“Inventory is the single-most important dataset those in the home building industry should watch,” Wolf says. “After years of the narrative being ‘no one will ever sell and reset their interest rate,’ we’ve learned that people will.”

Dietz says when accounting for new and existing single-family inventory together, the current months’ supply of both markets is 4.4.

“The gap between new-home months supply [and existing-home months supply] is elevated and as large as it has ever been. We remain in a lean inventory environment,” Dietz says. “I would start to get concerned about inventory when that combined months’ supply measure approaches 6.”

Dietz says some increase in existing-home inventory is coming from a reduction in the lock-in effect, which is beneficial as resale inventory levels are well below where they should be given population and housing stock levels. Wolf says more inventory “is not necessarily bad,” as it could mean more mobility and overall transactions. However, increased inventory will likely mean more competition for the new-home market.

“With the unlocking of resale inventory, a lot of the households that are putting their house on the market are going to become buyers, too. It is not just that inventory is going to go up and the market is going to get fixed and you’re going to have additional buyer activity,” Dietz says. “In general, yes, I think builders need to expect a rising inventory environment from the resale market and as total months’ supply approaches 6 we may see some slowing in building activity, but we are certainly a ways away from that.”

Federal Reserve, Inflation, Jobs Report

Inflation and the labor market remain of paramount importance given their influence on the policy actions of the Federal Reserve. While the Fed has elected to hold rates steady at each of its meetings thus far in 2024, indications are that the economy may have sufficiently cooled to prompt rate cuts before the end of the year.

“The Federal Reserve has communicated that they are generally happy with the progress seen in the labor market. Many indicators have now returned to 2019 levels and the balance between supply and demand looks a lot healthier,” Wolf says. “On the inflation front, after a brief uptick earlier this year, it appears we are back on track with slower price increases.”

Diet says the NAHB projects the Fed will cut the federal funds rate at its December meeting, though other market indicators suggest the first rate cut may occur at the Fed’s September meeting. In 2025, the Fed is expected to cut rates between four and six times, Dietz says.

The actions of the Fed will likely drive mortgage rates down from their elevated levels in 2024, though Wolf and Dietz both note they are not anticipated to return to the historically low rates of 3% to 4% seen in recent years. The NAHB projects rates will settle in a “new normal” range around 5.75% by the end of 2025.

“I think that would be a big improvement on the 7% to 8% rates that we have seen [and] it would price in a lot of demand,” Dietz says.

Dietz says as the Federal Reserve begins to cut rates, the industry should pay closer attention to taxes and government spending and their potential impact on rates.

“The larger the deficit, the more federal debt there is in the system and that pushes interest rates higher. We’re exiting a ten plus year period where the deficit mattered but it wasn’t really driving real increases in interest rates,” Dietz says. “The last few years, higher interest rates have been due to tiger monterey policy from the Fed; going forward we have higher interest rate risk from fiscal policy, and higher deficits in particular.”

Demand Side: Consumer Sentiment

Forecasting demand has been “very tricky” since the pandemic, says Wolf. One constant, though, is demographics that support future housing demand. Younger renters have indicated they would like to become homeowners once they can solve for affordability while older homeowners are hitting lifestage change milestones that may prompt moves as well.

Wolf says consumer sentiment and spending “will dictate where the economy goes” in the coming months.

“We are watching retail sales, durable goods, credit card usage, savings rates, and debt defaults to give us a sense for the health of consumers,” Wolf says.

Latuz says the developments in the housing market are likely a reflection in the overall economy, with a bifurcation of high income earners and those with housing equity who are able to access the housing market and those who struggle to access the market.

“What we see in a lot of America when we look at consumer sentiment is those who are still struggling to make everyday purchases with rising energy costs and thinking about the difficulty of meeting the needs of a household versus those who are doing OK,” Lautz says.

Latuz says 28% of resale buyers paid all cash in May, elevated from 25% at the same point a year ago. Institutional or second-home buyers accounted for 16% of the market, largely in line with historical standards.

“For the last couple months, first-time home buyers have trended up a bit [for existing-home purchases],” Lautz says. “I think it could be that these first-time home buyers are higher income earners [or] they are tired of being on the sidelines. Because of the lock-in effect that is happening, there are fewer repeat buyers actively participating in the housing market right now.”

Dietz says that while the NAHB/Wells Fargo Housing Market Index (HMI) reached its lowest level since December 2023 in June, six-month sales expectations “showed a small improvement.”

“I think that will pick up speed, because once the Fed gets to the point where it really begins to ease rates, whether it is short-term interest rates that determine borrowing costs for businesses or long-term interest rates which are dependent on policy and growth expectations, both will move lower,” he says. “Yes, the HMI is down right now [but] the surveys and our own forecasting models suggest that we should see improvement as we move into the latter part of the year and in 2025 we will see some growth as well.”

Supply Side: Labor, Lots, and Loans

Dietz says elevated builder and developer loans and tight lot conditions likely will become a larger factor in the housing market moving into 2025.

“When we look at the data, the high interest rates for development loans and for acquisition loans means that home buying demand is going to come back into the market faster as mortgage rates go down than lots [come online],” Dietz says. “In a lot of high volume and high growth building markets, watching lot supplies is going to be a key agenda item in 2025 and 2026.”

While lumber prices remain “under control,” Dietz says there is a risk of prices rising in a similar fashion as 2018 to levels in the $500 to $600 per 1,000 board feet range.

“As the demand for new single-family construction goes up as we move into 2025, my concern is that we won’t see enough domestic production of lumber and lumber prices could go up,” Dietz says.

Additionally, the labor shortage—estimated to be around 400,000 workers in the construction industry—will be a “top limiting factor on building homes and apartments and remodeling homes going forward,” he says.

The Election, Regulatory Policy, and Taxes

The upcoming presidential election will have a significant impact on the future of both regulatory costs and tax policy, according to Dietz. The prevailing approach of the winning administration will impact how friendly conditions are for builders on issues such as regulatory costs and environmental regulations.

“2025 is [also] going to be a big year for tax policy, so I think the composition of Congress is going to be key,” Dietz says. “I think there is an opportunity for the industry not only to fight for pro-business tax policies but [also] take another run at reforming the mortgage interest deduction which is claimed by very few taxpayers because the standard deduction is quite high.”

On a state and local level, Dietz says zoning, impact fees, permitting fees, approval times, green space requirements, design requirements, and local building requirements are among the numerous issues that are top of mind for builders across the country.

“I think the low hanging fruit in terms of improving the housing deficit is finding ways to allow more builders to provide more inventory for the market faster and at lower costs to buyers and renters,” Dietz says. “If you are thinking about the politics at a local level, it is absolutely critical for builders big and small to be members and engage with their local home builders associations or building industry associations to speak with one voice.”