There has been no shortage of negative headlines recently about the housing market, many of them alluding to the industry's "collapse" or "crash." And while yes, "housing is already in the midst of a downturn," according to NAHB's assistant vice president of forecasting and analysis Danushka Nanayakkara-Skillington, she also is sure to point out that the association expects housing to lead the economic recovery in 2024. "We forecast over a million single-family starts and 510,000 multifamily starts in 2024."
BUILDER recently asked Nanayakkara-Skillington and Zonda chief economist Ali Wolf where home builders and buyers can look to right now for some certainty amid today's economic conditions. Both said the persistence of inflation at such high levels is surprising and unexpected, with Wolf noting this level of inflation is the No. 1 risk to the economy.
"The longer inflation stays elevated, the more aggressive our policymakers will need to be and the greater the risk of some sort of policy mistake," Wolf says. She adds that higher interest rates hit all U.S. markets uniformly so a cooling is expected nationwide, although "housing is and always will be local, so certain locations will fare the shifting market better than others."
Production bottlenecks, rising home-building costs, and high inflation are issues all builders are facing, says Nanayakkara-Skillington, but some parts of the country will feel these issues more acutely than other markets. "Areas of the country at greatest risk are those where home construction costs and prices have significantly outpaced local income growth," she says. "Some markets in the Mountain states are experiencing this already, such as Boise and Denver."
Supply chain challenges that peaked during the pandemic are showing some "early improvements," Wolf says, but are not yet behind us.
"Building material challenges are somewhat getting better," Nanayakkara-Skillington says. "Lumber prices have fallen by half since the peak of last summer, and the recent news that the Canadian lumber tariffs are being reduced should further help with bringing the prices down. NAHB estimates that construction material cost growth has slowed to 'only' 12% year over year, which is an improvement over recent months."
The good news for builders is that, according to Wolf, Zonda's data "overwhelmingly shows that consumers still want to own a home one day." Wolf recommends that consumers don't plan to time the market. "They should consider why they are buying, how long they want to live there, and the pros and cons of renting and owning. The answers to those questions will help guide their purchase decision."
In the current environment, some builders most certainly are relying on lessons learned from the previous downturn. "Builder financing is tightening as financial conditions worsen," Nanayakkara-Skillington says. "We expect rates on builder loans to increase and underwriting conditions to tighten. Non-public builders should check in with their lenders regarding future loan terms."
While neither Wolf nor Nanayakkara-Skillington forecast an "official" recession in 2022, they do anticipate one is likely within the next 12 months.
"Builders and developers are often looking at longer-term time frames," Wolf says. "I think they need to think through what the next six to 12 months might look like and then run the scenarios of where the market will be in the medium term as well. There's still this unrelenting demand for housing, but affordability and confidence have proved to be the key determinants of market success."
Speaking of longer term, Nanayakkara-Skillington suggests builders be cautious until 2024. "However, the industry should keep in mind that the demand for new single-family construction will be solid over the next decade, meaning land and lot investment at the end of the current cyclical downturn will prove to be strategically valuable," she says. "Remember that housing leads the business cycle."
Wolf echoes that sentiment with her advice to builders right now: "We are in a place where strategy discussions and planning are critically important to make sure we can thrive during these challenging times. Stay nimble, stay informed, and remember: Housing is traditionally one of the first sectors to slow as the economy shifts but is also one of the first to rebound."