The construction industry is eyeing the remainder of 2024 with cautious optimism as Wells Fargo’s latest housing forecast projects a modest increase in total housing starts by approximately 0.5%, reaching 1.42 million units. This growth is driven by a 4.4% rise in single-family starts, countered by a 7.7% decline in multifamily starts. Existing-home sales are anticipated to climb by 6.6%, totaling 4.36 million units, while new-home sales are expected to surge by 7.2%, hitting 716,000 units.

However, despite these optimistic figures, the market’s underlying challenges cannot be ignored. Recent findings by Freddie Mac highlight a critical shortage of at least 1.52 million housing units required to balance the market. This shortage encompasses both for-sale and for-rent units and likely underestimates latent housing demand and unavailable units.

Price Trends and Mortgage Rates: A Delicate Balance

In 2024, the median new-home sales price is projected to rise modestly by 2.2% to $436,800. Meanwhile, the median sales price for existing homes is expected to increase by 3.1% to $406,800, maintaining a $30,000 gap between new and existing home prices. The conventional 30-year fixed-rate mortgage is forecasted to decline from 6.8% to 6.45%, a shift that could stimulate both new-home sales and existing-home inventory.
  • New-home sales: Expected to grow by 7.2% to 716,000 units.
  • Existing-home sales: Projected to increase by 6.6%, reaching 4.36 million units.
  • Median new-home sales price: Forecasted to rise by 2.2% to $436,800.
  • Median existing-home sales price: Expected to increase by 3.1% to $406,800.
  • Mortgage rates: Anticipated to drop from 6.8% to 6.45%.

Builders Adapt with Speculative Homes and Market Adjustments

Amid the ongoing shortage of existing-home inventory, builders have pivoted towards constructing more speculative homes to meet rapid delivery demands. This strategy is crucial for maintaining market momentum but requires careful management of spec inventory levels. Builders are advised to establish maximum inventory limits by community to avoid overbuilding.
The National Association of Realtors (NAR) has a more optimistic forecast, predicting total housing starts will rise to 1.48 million in 2024, comprising 1.04 million single-family starts and 440,000 multifamily starts. NAR’s outlook also includes a significant 19% increase in new-home sales, driven by anticipated reductions in mortgage interest rates and continued builder incentives such as discounts, concessions, and interest rate buy-downs. Additionally, NAR forecasts a 13.5% increase in existing-home sales, reaching 4.71 million units, although this remains below historical norms due to persistent inventory shortages.

Market Dynamics: Addressing the Housing Supply Crisis

Freddie Mac’s analysis underscores the persistent pressure on housing markets due to inadequate supply. Their findings suggest that without a substantial increase in available units, the housing market will continue to experience significant strain. This analysis may even understate the extent of the shortage, indicating a deeper issue within the market’s supply dynamics.
Construction business owners and industry stakeholders must remain vigilant and adaptable, leveraging market data and forecasts to navigate the complex landscape of 2024. By strategically managing inventory, optimizing pricing strategies, and staying informed on market trends, builders can better position themselves to meet the evolving demands of the housing market.
As the industry looks ahead, the interplay between supply constraints, pricing trends, and interest rates will continue to shape the construction landscape. Effective planning and proactive strategies will be essential in addressing the housing shortage and capitalizing on the anticipated growth in housing starts and sales.

Turbulence in Election Year

As the nation braces for the 2024 election, construction business owners must navigate a rapidly changing economic landscape. With potential shifts in the White House, the current administration is likely to exert pressure on the Federal Reserve, aiming to stimulate the economy through significant interest rate reductions. However, this comes with the risk of creating misleading signals of economic strength, despite underlying inflationary pressures.

Early Warning Signs: Economic Indicators Point to Recession

Recent economic indicators suggest that the construction industry should prepare for potential turbulence:
  • The Leading Economic Index (LEI) has declined for 23 consecutive months, hinting at a looming recession.
  • January 2024 saw weaker-than-expected performance in retail sales, manufacturing production, and residential construction.
  • Consumer spending remains high, especially on services, leading to a surge in credit card debt.
  • Prices in 15 service industry categories increased during January.
These trends indicate that despite appearances, the economy may be on shaky ground, reminiscent of the prelude to the 2008 recession. Builders must stay vigilant and scrutinize national economic news for trends that could impact their local markets.

Housing Market Slows: Mortgage Rates on the Rise

The housing market has shown signs of cooling, with significant drops in housing starts:
  • January witnessed a 14.8% decrease in housing starts, with single-family and multifamily starts declining by 4.7% and 35.8%, respectively.
  • Mid-February saw mortgage rates climb, with Freddie Mac reporting a 6.77% rate for a 30-year fixed mortgage, the Mortgage Bankers Association at 6.87%, and Mortgage News Daily at 7.14%.
These rising rates are expected to affect first-quarter sales, posing challenges for home builders.

Strategic Moves: Managing Speculative Inventory

In response to the shortage of existing-home inventory, many builders have turned to speculative homes for rapid-delivery programs. However, this strategy comes with its own risks. To mitigate potential exposure:
  • Monitor and limit speculative inventory by community to avoid excess finished inventory if the market softens.
  • Stay informed about national economic trends and adjust strategies accordingly.
The construction industry is facing numerous cautionary flags in 2024. By staying diligent and minimizing exposure to economic shifts, builders can better navigate the uncertainties ahead. The anticipated rise in new-home sales and existing-home sales, coupled with a modest increase in housing starts, paints a positive outlook for construction businesses and trade companies. Builders who strategically manage their speculative inventory and stay abreast of market trends will be well-positioned to capitalize on the growth opportunities ahead.
In this evolving landscape, having a robust business plan is more critical than ever. Small Business Growth Partners (SBGP) offers an invaluable resource through their Business Diagnostic & Plan of Action (BPA). Aligned with your Home Builders Association, this exclusive tool is available to members at no additional cost. The BPA provides a detailed and comprehensive analysis tailored to the unique needs of small business builders, remodelers, and trade companies. By leveraging SBGP’s expertise, construction businesses can navigate market fluctuations with confidence and achieve sustainable growth.