U.S. Housing and Construction Market Outlook

The housing and construction sectors are large consumers of steel. According to World Steel in 2023 construction consumed almost 50% of all steel produced worldwide. These industries continue to face challenges in 2024, but there are some signs of improvement on the horizon. This article examines key trends and data across residential construction, existing home sales, and commercial building activity to provide a comprehensive overview of the current U.S. market nation wide.

Residential Construction

Housing Starts and Permits

New residential construction showed positive momentum in August 2024:

Housing starts increased to a 1.356 million unit annual rate, up 9.6% from July and 3.9% year-over-year.
This ended three consecutive months of year-over-year declines in starts.
The boost came primarily from single-family units, which jumped 15.8% from July.
Building permits, a leading indicator, rose 4.9% from July to a 1.475 million unit annual rate.

However, year-to-date housing starts are still down 4.0% compared to 2023, indicating ongoing headwinds in the market.

Builder Sentiment

The National Association of Home Builders (NAHB) Housing Market Index, which measures builder confidence, improved slightly in August but remains in pessimistic territory:

The August HMI rose to 41, up from 39 in July but still below the neutral 50 level.
This ended four consecutive monthly declines.
The sales expectations component for the next six months increased to 53, turning optimistic for the first time since May.

Existing Home Sales

The resale housing market continues to struggle with low inventory and affordability challenges:

Existing home sales declined 2.5% in August to a 3.86 million annual rate, down 4.2% year-over-year.
This marks the 36th consecutive month of year-over-year sales declines.
Year-to-date sales are down 2.5% compared to 2023.
Inventory is at 1.35 million units, equating to 4.2 months of supply.
The median home sales price declined for the second straight month to $416,700.

Commercial Construction

Architecture Billings Index

The Architecture Billings Index (ABI), a leading indicator of nonresidential construction activity, continued to show contraction:

The August ABI fell to 45.7, declining for the 13th straight month.
All four regions and three major sectors saw declines in activity.
The commercial/industrial component registered 46.6, while multifamily residential came in at 44.0.
A trend of 50 is neutral. Below 50 is negative.

Dodge Momentum Index

The Dodge Momentum Index, which tracks nonresidential building projects in planning stages, showed some positive movement:

The DMI increased 3% in August to 220.4.
Commercial planning expanded 1.9% and institutional planning grew 5.7%.
This follows a 7.9% jump in July, indicating potential future growth.

Interest Rates and Housing Demand

The Federal Reserve’s recent 50 basis point cut to the federal funds rate has significant implications for the housing market in late 2024 and beyond. This move is likely to lead to lower mortgage rates, which could stimulate housing demand. This lowering of rates could generate lower borrowing costs for developers of non-residential construction projects.

Impact of the Fed Rate Cut

On September 18, 2024, the Federal Reserve announced a 0.50% cut to the federal funds rate. While the Fed doesn’t directly control mortgage rates, its actions have a strong influence on them. Here’s how this rate cut could affect the housing market:

Lower Mortgage Rates: As the federal funds rate decreases, lenders typically lower their interest rates on various loan products, including mortgages. This reduction makes borrowing less expensive for homebuyers.
Increased Affordability: Lower mortgage rates translate to lower monthly payments for the same loan amount. This improved affordability could bring more buyers into the market who were previously priced out.
Stimulated Demand: With more affordable financing options, we may see an uptick in housing demand. This could lead to increased competition among buyers and potentially drive home prices up in some markets.

Current Mortgage Rate Trends

As of September 2024, average 30-year fixed mortgage rates are hovering around 5.70%. This is already a significant decrease from the 6%+ rates seen earlier in the year. With the Fed’s recent action, experts anticipate further declines:

Rates could potentially drop below 5.5% by the end of 2024
Some forecasts suggest rates may settle closer to 5% in 2025

Factors Influencing Future Rate Movements

While the Fed’s actions are influential, other factors will also impact mortgage rates:

Inflation: Continued cooling of inflation could lead to further rate decreases.
Labor Market: A weakening job market might prompt more aggressive rate cuts.
Economic Data: Day-to-day economic indicators will influence investor sentiment and, in turn, mortgage rates.

Potential Market Response

The combination of lower rates and increased affordability could have several effects on the housing market:

Increased Buyer Activity: More first-time homebuyers may enter the market, taking advantage of improved affordability.
Refinancing Surge: Existing homeowners with higher-rate mortgages may look to refinance, potentially freeing up disposable income.
Inventory Challenges: If demand increases significantly, the already tight housing inventory could become even more constrained, potentially driving up home prices.
Regional Variations: The impact of lower rates may vary by location, with some markets seeing more dramatic effects than others.

It’s important to note that while lower rates generally stimulate demand, other factors like overall economic conditions, job security, and local market dynamics will also play crucial roles in shaping the housing market’s response to this rate environment. Potential homebuyers should closely monitor rate trends and consider their personal financial situations when deciding whether to enter the market. As always, consulting with financial advisors and real estate professionals can provide valuable insights tailored to individual circumstances.

Key Factors Impacting the Market

Several important factors are influencing housing and construction activity in 2024:

Interest Rates: Mortgage rates remain elevated but have declined from late 2023 peaks. The average 30-year fixed rate was 7.09% in early July 2024.
Affordability: High home prices and mortgage rates continue to strain affordability for many buyers. The median existing home price hit a record $419,300 in May 2024.
Inventory: Low existing home inventory remains a major constraint on sales activity. Many homeowners are reluctant to sell and give up low mortgage rates.
Labor and Materials: Ongoing shortages and high costs for construction labor and materials are impacting builders.
Economic Uncertainty: Concerns about a potential recession and job market cooling are affecting consumer and business confidence.

Outlook for 2025

While challenges persist, there are some reasons for cautious optimism in the housing and construction markets:

Mortgage rates are expected to decline further as the Federal Reserve begins cutting interest rates, potentially in September and December.
Lower rates could spur more existing homeowners to list their properties, helping to ease the inventory crunch.
New home construction, particularly in the single-family segment, is showing signs of picking up to meet demand.
Commercial construction planning is increasing, which may translate to more projects breaking ground in coming months.

However, affordability issues and economic headwinds will likely continue to constrain activity. The National Association of Realtors predicts median home prices will increase a modest 1.8% over the course of 2024.

Conclusion

The housing and construction markets face a complex set of conditions as 2024 progresses. While high costs and tight inventory remain significant hurdles, declining interest rates and resilient builder activity provide some positive signals. Both buyers and sellers will need to carefully navigate the evolving landscape, ideally with the guidance of experienced real estate and construction professionals. As we move through the final months of 2024, all eyes will be on Federal Reserve policy, inventory levels, and broader economic indicators to gauge the direction of these crucial sectors. With patience and strategic planning, opportunities still exist in today’s challenging but dynamic housing and construction markets.

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