Housing & Home Improvement Forecast NAHB forecast that single-family starts will rise about 5% this year, assuming that the Fed will cut rates in the latter half of 2024. However, as builders break ground on more homes, lot availability is expected to be a growing concern, along with persistent labor shortages. The 10-year Treasury rate, used as a basis for mortgage rates, is up more than 40 basis points since the beginning of the year. Mortgage rates have generally been below 7% since mid-December, and more builders are cutting back on reducing home prices to boost sales. Price Cutting and Incentives. In February, 25% of builders reported cutting home prices, down from 31% in January and 36% in the last two months of 2023. The average price reduction in February held steady at 6% for the eighth straight month. The use of sales incentives is also diminishing. The share of builders offering some form of incentive dropped to 58% in February, down from 62% in January. It was the lowest since percentage using incentives since last August. Rising Home Values. Home values are up more than 46% since 2019 and equity is up close to 70%, but turnover has dropped sharply. That equity level, which amounts to a $10 to $12 trillion increase since the pandemic, has not been tapped. Both HELOCs and cash-out refinancings have fallen to multiple years lows as interest rates have risen over the last 2 years. That means there is a tremendous amount of money available if consumers choose to tap into it. Aging Housing Stock, Rising Home Usage. More than 50% of homes are now at least 40 years old. That means those homes need frequent repairs and renovations whether the owners want to continue to live in them or sell them. While many people have gone back to the office, many more are still working from home, at least part of the time, so many homes need to be remodeled to accommodate working from home. Inventory Shortage. Estimates of the chronic inventory shortage of existing homes range from 2 million to 6 million units, and production of new homes is not coming close to keeping up with demand. Estimates for production this year show that 200,000 fewer homes will be constructed than are needed to meet demand. Millennials Aging into Market. Millennials are just a year or two away from becoming the single biggest segment for household formation, home buying and home improvement spending. Housing Affordability and New Index Housing affordability in the fourth quarter of 2023 was virtually unchanged. Mortgage rates that hit more than a 20-year high, coupled with elevated construction costs and excessive regulatory costs, left housing affordability holding near its lowest level in more than a decade. Only 37.7% of new and existing homes were affordable to families earning the US median income of $96,300 during the fourth quarter, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index (HOI), That is nearly identical to the 37.4% posted in the third quarter of last year, which was the lowest reading since NAHB began tracking affordability on a consistent basis in 2012. The fourth quarter also marks the final report of the long-running HOI series. Replacing the HOI in the first quarter of this year will be a new housing affordability index from NAHB called the Cost of Housing Index (CHI), a quarterly analysis of housing costs in the US and metropolitan areas. The CHI represents the share of a typical family’s income needed to make a mortgage payment. A low-income CHI will also be produced for families earning only 33% of the area’s median income. What Lies Ahead for Interest Rates? Fed minutes from their meeting in January show that the central bank remains concerned that inflation could stay stubbornly high. That could keep interest rates at 23-year high for longer than previously expected, affecting Americans' borrowing costs on everything from car loans to mortgages. In January, the Fed held rates steady for the fourth consecutive meeting. Fed Chair Jerome Powell said it is too soon to declare the war on inflation has been won. Fed officials typically want to use data from several months to guide them in making interest rate decisions. With the unexpected jump in the CPI in January, the Fed may want to wait for several months of steady or falling prices. The Fed typically cuts interest rates if the economy deteriorates sharply, pushing up unemployment, or if it's clear that inflation is under control and rates don’t need to remain elevated. By keeping rates high as inflation slows the Fed could put an unnecessary stranglehold on the economy. The Fed has repeatedly signaled they want to avoid cutting rates too quickly, but still confirmed three rate cuts this year is a “reasonable baseline.” Fed officials look at the US economy broadly when setting policy, including economic growth, the state of the job market and consumption. The Atlanta Fed is currently projecting first-quarter GDP to grow at a robust 2.9%. Softwood Lumber Tariffs Could Rise The US Department of Commerce has signaled that they plan to raise tariffs later this year on imports of Canadian softwood lumber products from the current rate of 8.05% to about 14%. NAHB has staunchly fought against lumber tariffs for years because they say tariffs have a detrimental effect on housing affordability. In effect, the lumber tariffs act as a tax on American builders, home buyers and consumers. NAHB has vowed to continue to call on the Biden administration to suspend tariffs on Canadian lumber imports into the United States and to move immediately to enter into negotiations with Canada on a new softwood lumber agreement that will eliminate tariffs altogether. © Robert Bosch Tool Corporation. All rights reserved, no copying or reproducing is permitted without prior written approval.
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