A Shifting Landscape: The US Residential Housing Market

The residential housing market is a cornerstone of the US economy, directly impacting millions of families and serving as a bellwether for the overall health of the nation. Several steel manufacturing sectors are directly impacted by demand from the residential housing market. Impacted product sectors include HVAC, Steel Framing, Metal Strut, Metal Doors, Appliances, Air Conditioners, Metal Roofing and Siding, Hot Water Heaters, Metal Buildings, Garage Doors and more. This article delves into the complexities of the US housing market, exploring recent trends, price fluctuations, and valuable insights for navigating this ever-changing landscape.

Is the Housing Market Hot or Cold? A Tale of Two Segments

Perhaps the most debated question in real estate revolves around the direction of home prices. The answer, unfortunately, is not a simple one. The US housing market can be broadly categorized into two segments: newly constructed homes and existing homes. While these segments are interconnected, they exhibit distinct dynamics that significantly impact pricing trends.

Existing Home Sales: A Tale of Low Inventory and High Prices

The market for existing homes is currently experiencing a unique situation. Nationally, the average price of existing homes has reached an all-time high of roughly $562,000. This seemingly robust market can be attributed to a significant shortage of available properties. The month supply of existing homes, a metric indicating how long it would take to sell all available listings at the current sales pace, sits at a mere 3.2 months. A balanced market typically has a 6.0-month supply, indicating a seller’s market with strong upward pressure on prices.

Existing home sales have dipped slightly for the second month in a row, but unlike the new home market, they have not yet experienced a year-over-year decline in price yet. However, it’s worth noting that existing home sales have been sluggish for quite some time, with a 32-month streak of year-over-year declines in volume ending in April 2023.

Despite the slowdown in sales, a key characteristic of the existing home market remains – low inventory. The current inventory of unsold existing homes sits at its highest level since October 2022, but when compared to the sales pace, it translates to only 3.5 months of supply. This remains below the pre-pandemic average of 2.7 months, highlighting the ongoing issue of limited existing home inventory. Interestingly, the median sales price for existing homes continues to climb, reaching $407,600 in April 2024.

New Construction: Price Adjustments in a Well-Stocked Market

The market for newly constructed homes presents a contrasting picture. The average price of a new home peaked in late 2022 at $512,000 and has since shown a slight decline. This trend can be attributed to a confluence of factors. The Federal Reserve’s monetary tightening policy, initiated in late 2021 to combat inflation, has increased interest rates, making mortgages more expensive and dampening demand. Additionally, unlike the existing home market, the new construction market faces a different supply challenge. The month supply of new homes currently sits at 8.3 months, exceeding the 6.0 months balanced market level. This surplus of inventory has put downward pressure on prices, forcing builders to offer incentives and potentially reduce home sizes.

New home sales data reveals a potential turning point in the market. April 2024 saw a 4.7% decrease in new home sales compared to March, and a 7.7% decline year-over-year. This marks the first year-over-year decline in new home sales since March 2023.

Furthermore, the inventory of new homes has been steadily climbing, reaching its highest level since February 2008. With April’s sales pace, the current inventory translates to 8.5 months of supply. This surpasses the upper limit of the normal range, indicating a potential oversupply of new homes on the market.

A Tale of Divergence: Why Prices Move Differently

The key to understanding the divergent price trends lies in the contrasting supply situations within each market segment. Existing homes face a persistent shortage, allowing sellers to command premium prices. Conversely, the new construction market experiences an oversupply, leading to price adjustments by builders. This dynamic has resulted in a record spread between the average price of a new and existing home, with the latter being over $60,000 more expensive.

Architecture Billings Index (ABI): A Mixed Bag

The Architecture Billings Index (ABI), a measure of non-residential construction activity, paints a somewhat unclear picture. In April 2024, the ABI reached 48.3, a slight improvement from March but still below the crucial threshold of 50. Any reading below 50 indicates a contraction in activity, while readings above 50 signal expansion. This marks the ninth consecutive month where the ABI has fallen short of 50, suggesting a persistent slowdown in non-residential building projects.

It’s important to note that the ABI is a leading indicator, meaning it can provide clues about future trends in construction spending. The sustained low readings on the ABI could potentially foreshadow a decline in commercial and industrial building activity in the coming months.

What Do The Mixes Signals Mean for Homebuyers?

While the housing market exhibits mixed signals, here are some takeaways for potential homebuyers:

Existing Homes: The low inventory in the existing home market can translate into bidding wars and potentially higher prices for buyers. However, with interest rates on the rise, careful budgeting and a strong understanding of affordability are crucial.
New Homes: New home construction might offer a more attractive price point due to potentially lower average prices. However, the rising inventory levels could lead to price negotiations and potentially better deals for buyers.

Remember, the housing market is geographically specific. National trends provide valuable context, but potential homebuyers should closely examine market conditions and price movements in their desired location. Consulting with a local real estate professional can offer valuable insights and guidance tailored to specific needs.

Beyond Headlines: A Deeper Look at Affordability

While headlines often focus on national price averages, it’s crucial to consider the significant regional variations within the US housing market. Major metropolitan areas like Miami have witnessed staggering price increases of 75% since 2020, while some regions have even seen price declines. These discrepancies highlight the importance of localized market analysis for both buyers and sellers.

Valuation Metrics: Are We in a Bubble?

Another critical factor to consider is housing valuation. A valuable metric for assessing affordability is the home price to income ratio. This ratio compares the average home price to the disposable income of the population. For newly constructed homes, the ratio has returned to near-average levels after a temporary spike during the pandemic [Source: Industry Report]. However, existing homes still exhibit a higher-than-average home price to income ratio, indicating a potential overvaluation compared to historical trends.

So, Is Now a Good Time to Buy a Home?

The answer depends on your specific circumstances, location, and risk tolerance. Existing homes, while offering a wider selection, may come at a premium price due to the limited inventory. Newly constructed homes, though potentially more affordable on a per-square-foot basis due to size adjustments, may face further price declines if the oversupply persists.

Here are some general considerations:

For Buyers: If you’re flexible with location and willing to consider a newly constructed home, you may find more attractive pricing options. Existing home buyers in competitive markets may need to be prepared for bidding wars and potentially above-asking-price offers.
For Sellers: The existing home market still offers a strong selling environment due to low inventory. However, sellers of newly constructed homes may need to adjust their pricing strategies to compete with the existing market and address potential oversupply concerns.

What Lies Ahead? Navigating Uncertainty in the Housing Market

The future trajectory of the US housing market remains uncertain, influenced by several key factors:

Federal Reserve Policy: The Federal Reserve’s monetary policy decisions will significantly impact mortgage rates and overall housing demand. If the Fed continues to tighten monetary policy, interest rates could rise further, potentially leading to a more significant slowdown in the housing market. Conversely, a shift towards a more accommodative policy stance could reignite demand but also exacerbate inflationary pressures.
Inventory Levels: Trends in housing inventory, particularly for new construction, will be crucial. If builders continue to adjust their production schedules in response to the current market conditions, a more balanced supply-demand dynamic could emerge. However, persistent oversupply could lead to steeper price corrections in the new construction market.
Economic Conditions: The overall health of the US economy will undoubtedly influence the housing market. A strong economy with robust job growth could bolster housing demand. Conversely, an economic slowdown or recession could lead to a decline in housing demand and potentially trigger price corrections across both market segments.
Rising Interest Rates: The Federal Reserve’s monetary tightening policies, aiming to curb inflation, have led to rising interest rates. This has made mortgages more expensive, potentially deterring some potential buyers from entering the market, particularly in the new home sector which is more sensitive to interest rate fluctuations.
Supply Chain Issues: Ongoing supply chain disruptions continue to impact the construction industry, potentially delaying new home construction projects and contributing to the existing home inventory shortage.
Affordability Concerns: The combination of rising home prices and increasing mortgage rates is squeezing affordability for many potential buyers. This is likely impacting demand, particularly for new homes which tend to be more expensive than existing ones.

Conclusion: Knowledge is Power in a Shifting Market

The US housing market is currently undergoing a period of significant transition. While existing homes see sustained price increases due to constrained supply, the new construction market faces price adjustments due to an oversupply. Understanding these nuances and conducting thorough market research are crucial for both buyers and sellers navigating this dynamic landscape.

For potential homebuyers, patience and flexibility are key. Consider a wider range of locations, including areas with new construction, to find the best value. Existing home buyers should be prepared for competitive bidding processes and potentially elevated prices. Sellers in the existing home market can still capitalize on the low inventory environment. However, builders of new homes may need to adapt their pricing strategies and construction volumes to address market conditions.

By staying informed about economic trends, Federal Reserve policy decisions, and local market dynamics, individuals can make informed decisions in the US housing market, even amidst ongoing uncertainty.