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Receding mortgage interest rates, expectations for Federal Reserve monetary policy easing, and weakening (but still solid) macroeconomic data are shaping a market environment that should enable single-family home construction expansion in 2024. With peak interest rates for this cycle now in the rearview mirror, bond investors are looking to lock in rates, setting the stage for gradual declines of long-term interest rates in the quarters ahead. Indeed, since late October — when the 10-year Treasury touched 5% for the first time since 2007 — mortgage rates have fallen back by more than 110 basis points to just above 6.6%.
As rates move lower in fits and starts over the coming year, more housing demand will be priced back into the market. This should boost new home sales volume in the near term. The Census Bureau’s November data for new sales showed weakness because of the prior peak for rates, with contracts down more than 12% at a 590,000 annualized rate. Despite the challenging conditions in the fall, sales were up more than 3% on a year-to-date basis. However, new home inventory is rising, which will dilute some of the effect of the future increases for demand as rates move lower. Existing home inventory should rise in 2024 as the “mortgage rate lock-in effect” eases somewhat.
Labor market data continue to be solid, which is a positive for both for-sale and for-rent housing demand. In December, payroll employment increased by an above-forecasted count of 216,000. The unemployment rate held steady at a 3.7% rate. NAHB expects slowing employment growth ahead, but the unemployment rate should remain below 5% as the macro cycle turns a corner.
However, because of tightened monetary policy, the count of total job openings for the economy continues to move lower. In November, the number of open jobs declined to 8.8 million. This is notably lower than the 10.8 million reported a year ago. NAHB estimates indicate that this number must fall back below 8 million for the Federal Reserve to feel more comfortable about labor market conditions and their potential impacts on inflation.
In contrast to the overall labor market, the number of job openings in construction is increasing. The count of open construction jobs increased to 459,000 in November after a revised reading of 416,000 in October. The count was 348,000 a year ago, during a period of housing market cooling. The recent rise indicates an ongoing skilled labor shortage for the construction sector. As the home building market expands in 2024 (with the exception of apartment construction), the construction labor market will tighten further.
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