The homebuilding industry has faced significant headwinds in 2024 ranging from economic issues, high interest rates, skyrocketing labor costs, dramatic increases in building material cost, market expectations, economic anxiety and political ramifications impacting developers and homebuilders. In August 2024, the National Association of Home Builders’ Economic and Housing Policy Group created a Housing Market Index (HMI) in collaboration with Wells Fargo Bank. The NAHB/Wells Fargo HMI (attached hereto – August 2024 survey) asks builders to rate market conditions for the sale of new homes at the present time and expected over the next 6 months, as well as the traffic of prospective buyers. The results are combined into a single composite index that measures the overall strength of the market for new single-family housing. The survey questionnaire was sent to a panel of 3,000 builder members. A total of 414 builders responded to the survey (14% response rate) which were specifically asked – “what are the most significant problems faced by builders during 2023, and problems they expect to face during 2024”. The following provides a summary of the results and provides guidance to navigate these waters for homebuilders going into end of 2024.
Economic Headwinds
The impact of high interest rates on prospective homebuyers is hurting home sales in the United States. On average, a 30-year fixed rate mortgage is approximately 7% and a 15-year fixed rate mortgage is in the 6-6.5% range (see Bankrate.com/mortgages). The ripple effect has led to an overwhelming 77% of builders bracing for continued high-interest rates in 2024 and 2025. The higher the rate, the greater the cost for financing new construction projects, making it imperative for industry leaders to plan with detailed precision and perhaps explore alternative funding or hedging options to lock in lower rates. It’s not just about navigating the finances – it’s about being steps ahead.
This is coupled with the hesitancy of homebuyers to enter the marketplace instead of renting. The report indicated that 77% of builders expect buyer hesitancy, hoping for price cuts or lower interest rates. It underscores the need to build customer confidence through transparent communication and education about the market. It is important to encourage active homebuilding and that now is the right time to build—waiting on the sidelines might mean missing out on the opportunity and loss in brand marketability.
In addition to high interest rates, builders are preparing for rising inflation with over 52% of homebuilders concerned about cost management and profit squeezing efforts. Inflation drives up costs and creates budgeting nightmares for builders. The best strategy is to create flexible financial models that account for varying inflation scenarios, ensuring that you’re prepared for economic winds. The following is an economic forecast chart provided in the HMI that speaks to these economic headwinds.
The High Price of Goods and Labor Shortages
Over 55% of builders are expecting employment and economic concerns in relation to normal market conditions. There are broader questions regarding the longevity and resilience of the construction industry. The real value of the land and the continuous need for housing in this country should assist in reassuring builders that the investment in real estate and housing traditionally survives these economic twists and turns.
The need for skilled workers, apprenticeships and training programs has left the workplace in construction bare. 75% of builders anticipate challenges in the availability and cost of labor. It is imperative to combat labor shortages with competitive compensation, continual training programs, and a culture of excellence that attracts and retains the best in the business. For a detailed look at the problems and practical solutions to combat these ongoing construction labor shortages, please read our prior article entitled “Labor Shortages in Construction” from 11/27/23. (https://kahanafeld.com/2023/11/27/labor-shortages-in-construction/)
Another concern to construction activities is the continued increase in the price of goods and building materials. As the cost of materials can fluctuate, proactive procurement and supply chain optimization become key. Some practical solutions include fostering relationships with material suppliers, buy in bulk where it makes sense, and always have a “Plan B.” In construction, it’s not just about having the right tools for the job, but also the right materials at the right price.
Difficulty in Predicting the Future
With any Presidential Election year, builders and homebuyers are bombarded with media coverage about economic concerns. The political media coverage tends to discuss the impact of interest rates, loan amounts, building costs, construction material costs and labor/employment concerns during the campaigns. The HMI reports that 54% of builders anticipate that negative media reporting will impact on homebuilding. The key is to stay informed, stay connected with your local and state representatives and policy groups, and remain nimble during the political process to ensure your builder stays on top of the trends and forecasting.
Conclusion
While every year brings challenges in the construction industry, it is imperative that homebuilders continue to perfect their craft, continue to create inventory, and continue to employ a construction workforce that drives our economy. As long as builders stay informed, stay diligent, and stay committed, the homebuilding industry will continue to thrive in spite of these ongoing challenges.
