November 17, 2023

Everyone my name is Taylor St. Germain with ITR Economics and welcome to this episode of TrendsTalk. It’s been about three months since we last talked about the housing market, and that’s a full quarter of data for us. And so I wanted to provide an update on what’s going on in the residential housing market, specifically looking at US single-family housing starts. Good news. I want it to be a little bit more upbeat today. In the last few episodes, I’ve been talking about recessions, margin challenges, and so I wanted to bring some good news today, which is that the housing market is in the recovery phase of the economic cycle. So here at ITR, we refer to that as phase A recovery. What that means is that the rates of change have transitioned to rise.

Now in some cases still below zero, still negative, but seeing that pace of decline easing, seeing that rate of change move back up towards the zero line, that’s great news for the housing market who’s been through a little bit of a struggle, some challenges as we look at the last year and a half really coming off that pandemic sugar high. So I wanted to first point out that the housing market leads the economy. This is something if you follow ITR Economics you know quite well, which is that wherever the housing market goes, the production, manufacturing economy typically follows. So by looking at housing, we’re really at the front end of this economic train. And as I had just mentioned, US single-unit housing starts has transitioned to phase A recovery. So let me call out some metrics to put this in perspective for you.

So the 312 rate of change for US single-unit housing starts reached a low point in January of this year, January of 2023, and that rate of change low was down about 30% compared to the same period one year prior. So that low in the 312 rate of change January 23 at about 30% down. Well, that 312 rate of change has hit a number of positive checking points as we call them at ITR, which is that not only has that 312 rate of change bottomed out, but it’s actually crossed above zero with the most recent data. So as we’re sitting here today, that growth rate is at 6.8%, almost 7% above that same period one year ago. So if you look at the last about nine months, we’ve gone from down 30% to up almost 7%. That’s great news for the housing market in terms of the recovery.

Now the annual growth rate is still down at about 16.4%, so that’s a 12/12 rate of change, but we expect that growth rate to improve. In 2024, we’re forecasting the single-family housing market to grow 8.6% year over year, and then in 2025 that growth continues, albeit at a slower pace coming in at about 3.8%. So we’re preparing for two years of growth in the housing market. So now is really that time for those home builders out there to be investing in those efficiencies, to be hiring, to be preparing for the growth that’s coming our way in 24 and 25.

Now, of course, we need to watch interest rates, right? Some rates have changed, still negative as I had mentioned that annual growth rate, but as the Federal Reserve has indicated in 2024, likely more towards the second half of the year and continuing into 2025 interest rates, thus mortgage rates will likely be coming down and that will spur some of this new home buying activity. So good news ahead in 25 and 26, and we’re already seeing some of the early signs of good news. I wanted to call out a few other metrics. Looking at permits, I was just mentioning starts. If we look at permits, look at the year over year growth rate that data set too has bounced off a rate of change low. So back to January of 2023, permits were down about 26% year over year. They have now improved to only being down about six and a half percent year over year.

So we have all of these signs of recovery that’s really occurring in the housing market today, which is starts’ internal rates of change improving you’re seeing the permit’s rate of change working its way back towards that zero line. And then the other thing we’ve seen as of late is new homes sold. So new homes sold, that rate of change is improving as well, that we saw an annual growth rate low in February of 2023 for new homes sold down about 20% year over year, and now we’re only down about 2% year over year. So you can see how all of these growth rates are showing us the signs of recovery and are continuing to progress in terms of working their way back towards zero and likely above zero as we look at the balance of 24 compared to 2023.

The last trend that I wanted to call out today is good news for home buyers, might be a little concerning for those of us that already own a home and are looking to build some equity, but we’ve seen prices come down and that’s going to help, especially after this unprecedented run-up in prices that we saw during that post-pandemic timeframe. So when you look at prices on a quarterly basis, and I’m referencing US new home median sales price, that peaked in December of 2022 at about $480,000. Again, that’s a median number throughout the country. That data has since retreated and we’re now looking at a median price of about 416,000. So we’ve gone from 480,000 to about 416,000 in about three-quarters of time.

Now, that’s not something worth reading too much into from our perspective. It’s good news for new home buyers as things become slightly more affordable, is a way I’ll put that. But for those of you that own a home and are concerned about equity, we really just see this as a return to trend. We see that long-term price going up in the second half of this decade, but we saw this crazy unprecedented rise during the pandemic. So a little bit of decline like we’re experiencing here today, that’s not that unusual to us as we return to that long-term pricing run rate or long-term pricing trend.

So there’s good news out there in the housing market. If you’re in the housing market, sell into the housing market, a home builder, now is the time to be preparing for some pretty attractive growth that’s coming our way in 24 and 25 from ITR’s perspective. Again, please watch those mortgage rates and interest rates because as you can imagine, that has a big impact on our thinking, and our CEO Brian Bolio covers our thoughts on what’s going on with the Federal Reserve and rates every Friday on our Fed Watch video series. So please stay up to date with that. This forecast that I mentioned here today for the single-family housing markets in the Trends Report, please feel free to check that out. But some good news during some generally speaking, troubling economic times when we look at some of the indicators out there. I hope you found this information helpful. I’m Taylor St. Germain with ITR Economics, and I’ll see you on the next TrendsTalk.