Given the generally upbeat consumer sentiment, prospects are good for the housing sector – an important driver of the overall economy.
“New home sales are running at the top end of the range set in the decade preceding the pandemic,” Yaros says. “One reason is that a lack of existing inventory is pushing buyers to consider new homes. The construction industry is stepping in to close the gap, and housing starts have exceeded expectations.”
The construction of new homes is being fueled by a cold hard fact: There aren’t enough existing homes to meet demand.
“The 3.1 months’ supply of existing homes remains well below the four to six months of inventory that is considered a balanced housing market,” Yaros says.
Strong demand caused a 10.3 percent increase in the median price for existing homes in 2022, and a 0.6 percent increase in 2023. A correction of 1.1 percent is expected in 2024.
For an explanation of the scarcity, look no further than the run-up in mortgage rates. The ultra-low interest rates of existing mortgages amount to a strong financial incentive for existing homeowners to stay put.
“Current homeowners had refinanced their investments at 3 percent or 4 percent,” says Bill Conerly, principal of Conerly Consulting. “Replacing what they had with better homes would require walking away from those mortgages to take on new ones at 7 percent. I think we’ll see this trend continue for another year, but I think we’ll also see a lot of strength in remodeling, and that will be financed probably with home equity lending or second mortgages.”
Keeping watch
In the opening months of 2024, economists are advising construction companies to keep an eye on some key statistics to get an idea of how the year will turn out.
“One leading indicator the construction companies should look at is the level of permits issued for various construction activities, whether they are single-family homes, apartments or nonresidential,” Basu says. “Another would be the Architecture Billings Index, which is a reflection of architect activity. If the architects and engineers are busy upstream, it means contractors will more likely be busy downstream.”
While construction companies tend to focus on materials prices, which have recently been roughly flat, Basu says the cost of money has a much greater effect on the bottom line.
“Pay close attention to what Federal Reserve policymakers are saying about inflation early in 2024, and assess how that will affect interest rates,” Basu says, “which are already so high that they foreclose the possibility of many projects moving forward because they simply don’t pencil out anymore.”
Conerly advises keeping an eye on two statistics that might indicate a pending downturn. One is any increase in initial claims for unemployment insurance. Another is an inversion of the yield curve, in which short-term interest rates exceed long term ones.
Whatever the condition of the tea leaves, businesses in general will encounter a tougher operating environment in 2024, characterized by a need to finesse a tight labor market and reluctant lenders.
“In the coming year we will face uncertainty about inflation and interest rates, shortages of labor, higher energy costs, a slowdown in China’s economy and recurring threats of a federal government shutdown,” Palisin says. “There are a lot of spinning plates in the air, and some of them may fall and crack.”
Phillip M. Perry is a journalist who is published widely in the fields of business management, workplace psychology and employment law.