The storm clouds are lifting for the builder business after two years of rough sailing. Following a turbulent 2023—which saw sharp declines in demand and home prices—falling mortgage interest rates and positive economic data signal improving housing conditions as 2024 kicks off.
“With moderately lower interest rates in 2024 and outright Federal Reserve cuts during the second half of the year, single-family home building will post an increase this year, rising by approximately 4%,” said Robert Dietz, senior vice president and chief economist, National Association of Home Builders (NAHB). “We are forecasting more rapid growth in 2025 with still lower mortgage rates and a persistent housing shortfall.”
The housing market, a major driver of residential flooring sales, appears to have passed peak mortgage rates. This is an important development, observers say, as it is expected to help spur home buying demand in the coming months. The proof is in the pudding, as builder confidence for newly built single-family homes rose for the first time since July, according to the latest NAHB/Wells Fargo Housing Market Index (HMI).
“With mortgage rates down roughly 50 basis points over the past month, builders are reporting an uptick in traffic as some prospective buyers who previously felt priced out of the market are taking a second look,” said Alicia Huey, NAHB chairman and a custom home builder/developer based in Birmingham, Ala. “With the nation facing a considerable housing shortage, boosting new home production is the best way to ease the affordability crisis, expand housing inventory and lower inflation.”
To say that the homebuilding market in 2023 was tough would be an understatement. Mortgage rates more than doubled to higher than 7% through November, and many builders reduced home prices and provided sales incentives to boost sales. Fanning the flames were high costs for land development, lumber and other building materials—all fueled, in part, by high inflation.
“Single-family construction has been on a downward trajectory over the last two years, as higher interest rates and skyrocketing home prices created the worst affordability in 15 years,” said Sarah Martin, associate director of forecasting, Dodge Construction Network. “Supply has been crimped by a lack of workers, high materials prices and, in some regions of the country, unsupportive zoning regulations.”
The pulse of the single-family housing market began to strengthen in December following a flurry of encouraging economic news. Freddie Mac reported 30-year fixed-rate mortgages fell under 7% for the first time in four months. Single-family housing starts in November—the latest period for which reliable numbers are available—jumped 18% to a seasonally adjusted rate of 1.14 million and a whopping 42% higher than November 2022, according to the U.S. Department of Housing and Urban Development.
Most of this new housing growth occurred in the Northeast and Midwest regions as mild temperatures and dry conditions reportedly contributed to surges of 43% and 50%, respectively, over the seasonally adjusted rate for November. On a year-to-date basis, NAHB reports new home sales are up between 2.6% and 5% in each of the four U.S. regions. “The long-term outlook for the single-family market continues to be very robust,” said Scott Baker, vice president of sales builder/single family, Shaw Industries. “Once some of the affordability aspects like mortgage rates, cost of goods, etc., come back to traditional norms, the single-family market should have many years of solid growth.”
Turning the corner
While economic indicators point in the right direction, the housing market is a long way from recovery. Despite positive news about drops in inflation and mortgage rates, the Mortgage Bankers Association’s (MBA) weekly mortgage applications survey reports a 1.5% decline for the week ending Dec. 15. “At least as of that week, borrowers’ response to this rate move was rather tepid,” stated Mike Fratantoni, MBA’s SVP and chief economist. “Refinance applications jumped 18% for the week, but otherwise both refinance and purchase applications showed small declines.”
The snail’s pace of the housing market’s growth is amplified by the number of privately owned units authorized by building permits. In November, this figure was nearly 1% higher from the previous month to a seasonally adjusted annual rate of 1.46 million, the Census Bureau reports.
“The first three months of 2024 are likely to be reasonably flat, showing neither improvement nor contraction in single-family starts,” Dodge’s Martin predicted. “But once the Fed begins the long process of loosening monetary policy, more steady growth will take hold in the back half of the year.”
The projected housing market upswing is welcome news to the flooring industry. “Single-family sales started to plateau and then rebound in Q1 and Q2 of 2023, which made us think 2024 would be possibly up 10%,” Shaw’s Baker noted.
Indeed, the two-year downward trend in single-family housing came to an end in the first quarter of 2023, reports show. In the nine months since January, single-family starts increased 35%, Dodge reports. “The impetus for this growth was a stabilization in mortgage rates,” Martin noted. “When combined with a healthy labor market, demand for new homes was strong enough against a backdrop of tight supply that builders resumed construction.”
As inflation levels and mortgage rates drop, consumer budgets and purchasing power are expected to escalate. Which is good news for builders and residential flooring contractors as more consumers are incentivized to purchase a home sooner rather than later. “The No. 1 concern is the cost of money,” noted Dan Butterfield, Dal-Tile’s vice president of residential sales. “Interest rates will continue to largely impact the health of our economy and industry.”
Impact of still-high costs
While most industry observers see lower interest rates as good news, there’s still another challenge to contend with—the unusually high construction costs. “New construction costs have gone up for builders,” said Brian Carson, AHF Products president and CEO. “But as interest rates go down, you’re going to see spaces getting bigger and people trading up as they want the nicest place they can afford.”
Housing affordability is one of the biggest issues facing builders in the new year and has a trickle-down effect for providers of interior decorating products such as flooring. For instance, single-family builders are increasingly focused on mortgage rate buy-downs to get buyers in homes. “This is driving larger builder margins on hard surface upgrades to help fund projects,” said Todd Hershauer, director, builder and multi-family, Mannington. “There is also price pressure from the home buyer for lower cost options.”
If more production builders adopt an “everything included” package, it could reduce customization of homes by consumers, observers note. “This can reduce profitability for those builders, flooring contractors and manufacturers who have enjoyed customized material selections made within design studios,” Dal-Tile’s Butterfield said.
Further impacting home sales in 2024 are rising regulatory costs, which, on average, represent nearly one quarter of the price, builders report.
“There are proposals under discussion that would require FHA-mortgage home buyers to only buy new homes built to the 2021 energy code,” NAHB’s Dietz stated. “This could spread to other financing means, raising the cost of buying a home and pricing out many prospective home buyers.”
