U.S. Housing Revival

Housing Data Trending Upward

One of our favorite ideas for 2024 has been housing, and the data continues to support our outlook for a housing recovery. Housing starts in February rose 10.7% m/m and 5.9% y/y, beating expectations, and posted higher revisions for the previous two months. Single family homes rose 11.6% m/m – the highest in two years. Single family permits, a leading indicator, increased 29.5% y/y. Home sales rose to the highest annual rate in a year and increased 9.5% m/m. Cash buyers improved 28% y/y, and first-time buyers accounted for 25% of the total. This last point is important because not only are we over 5 million homes short in the country, but we now have 5 million millennials beginning to purchase first time homes. The industry has underproduced in the past 14 years – the supply/demand imbalance is quite tight – even in the higher interest rate environment. To this point, the continuation of falling home prices is one reason we are seeing buying interest. The median sales price decreased 7.6% y/y to $400,500, the sixth consecutive month of y/y decline. 

Chart 1: Housing Starts and Building Permits Reflect Strong Demand, Supply Shortages¹

Chart 2: U.S. Existing-Home Sales Rise in Consecutive Months²

Supply Demand Imbalance Remains

High mortgage rates have kept potential buyers on the sidelines for most of the last two years. The Fed lowered interest rates to nearly 0% in 2020, and mortgage rates followed, dropping to below 3% in the second half of 2020 and staying near that level for all of 2021, creating a historic volume of mortgage and homebuying activity. Months later, mortgage rates began to rise above 5% by May 2022 all the way to 7.9% in October 2023.

The problem that arises from a swing of this magnitude in such a short period of time is the lock-in effect: homeowners who locked-in a mortgage below 3% in 2020 or 2021 are unwilling to sell their homes and lose their ultra-low rates, leading to the tightest home supply we have seen in decades. Redfin reported earlier this year that 75% of mortgage holders have rates below 5% and 25% have rates below 3%.³ Furthermore, the months’ supply for U.S. existing homes is currently 2.9 months. The National Association of Realtors states that historically, 6 months of supply indicates a balanced market.⁴

Chart 3: Over 50% of U.S. Mortgage Holders Have a Rate Below 4%⁵

The U.S Faces an Extreme Housing Shortage

The resistance from existing homeowners to sell is not the only challenge that the U.S. housing market is facing. Due to a decade-plus of under-construction, the U.S. has a massive shortfall of single and multi-family homes. Recent analysis shows that the gap between single-family home constructions and household formations grew to 7.2 million at the end of 2023.⁶ ­The pace of household formation and population growth have greatly outpaced the construction of new homes for over ten years. We see this narrative beginning to change this year with improving interest rates, increased construction and demand remaining elevated.

Lower mortgage rates should support both supply and demand, and we continue to see supportive data. The consumer is in a great position as we have been highlighting, with increasing job and wage growth along with a strong economy. Decreasing interest rates this year will greatly support further growth in the U.S. housing market. Last year, mortgage rates hit 23-year highs, sales sank to a 13-year low, prices hit their highest levels ever and affordability fell to its lowest since 1984. Despite all this, 4.5 million people bought homes in the U.S.⁷

2024 Outlook is Encouraging

The Fed reinforced the belief last week that markets will see 75 bps worth of interest rate cuts this year. Rates aside, homebuilders are becoming more confident. Homebuilder sentiment reached an eight-month high in March, indicating that new home sales will likely increase in the coming months. Additionally, single-family starts hit a near two-year high in February rising 11.6% m/m and over 30% y/y. The Midwest and South saw the greatest gains at 50.8% m/m and 15.7% m/m, respectively. With fourteen-consecutive months of rising single-family building permits, housing demand has been robust and should only improve with potential rate cuts on the horizon.

Housing starts continuing to strengthen tells us that economic growth will carry on, likely in the form of a multiplier effect. When moving into a new home other cash outflows are likely going to be needed – furniture, appliances, remodeling, etc. Data shows that buyers of new homes spend four times as much as non-moving owners and twice as much as buyers of existing homes within the first year of the closing sale.⁸

The largest outlay of funds post-moving comes in the form of alterations and repairs, averaging $12,000 for new home buyers and $5,760 for existing home buyers. Appliances and furnishings also cost new home buyers thousands more on average compared to existing home buyers and non-moving owners. That said, first-time home buyers accounted for 32% of all buyers in 2023, up from 26% in 2022. As housing begins to rebound in a lower rate environment, we expect to see many related sectors follow suit.

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Sources

1. FactSet. As of March 25, 2024.
2. FactSet. As of March 25, 2024.
3. Redfin. As of January 12, 2024.
4. NAR. As of January 22, 2021.
5. Redfin. As of January 12, 2024.
6. Realtor.com. As of February 27, 2024.
7. CNN Business. As of December 27, 2023.
8. NAHB. As of June 13, 2022.

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