September 9, 2024

Taylor St. Germain:
Hi, everyone. My name is Taylor St. Germain with ITR Economics, and welcome to this episode of TrendsTalk. We at ITR are your apolitical and unbiased source of economic intelligence, and today I wanted to talk about the housing market.

It’s been a little while since we talked about the housing market, and we’ve chatted about it here and there as it relates to interest rates, but I wanted to give a little bit more of a deep dive and more in-depth update on what we’re seeing come out of the housing market data. Because if you’ve been paying attention to the US Single-Family Housing Market, you’ll notice that there’s some weakness that’s come through in the data as of late. This actually led to a revision in our forecast for US Single-Unit Housing Starts.

Now, before we overreact, because I said the word revision, it was a very mild revision. We’re talking about 2% as we looked at 2024 in that range and there’s more information there in the Trends Report, so I say revision, it’s a small tweak, but I do want to talk about what we’re seeing in the data, and that’s some weakness.

This is why, again, it’s so important we see these interest rates start to come down, because we are seeing weakness in different areas of the economy, but especially in the housing market. The weakness that I’m talking about is if you look at US Single-Unit Housing Starts, the 3/12 rate of change, the most recent three months compared to the same three months one year ago, that growth rate dipped negative. It is at a minus 3.1%. Now, the annual growth rate’s still up at 13%, but as you know from following ITR, the 3/12 leads to the 12/12, and that tells us there’s some dissent coming our way in the growth rate, the annual growth rate.

So, what’s driving some of this weakness, other than high mortgage rates, which for all the home buyers out there are really excited that the Fed has started to signal rate cuts are coming our way, but other than that, it’s really general affordability concerns, and it’s not just the mortgage rate that’s playing into that conversation, it’s also the price.

We have this really interesting map of the United States, and what this map shows us is the average household income in terms of a surplus or deficit needed to afford an average priced home in the associated state. Every single state around the US is negative, other than Louisiana and West Virginia, and so what does that mean? That means every state outside of Louisiana and West Virginia, consumers are in a deficit in terms of having the amount of income to afford an average priced home. So, if you’d like to live in West Virginia or Louisiana, your dollar can go a little bit further than some of these other states out there, but that highlights this constant affordability challenge. Again, if you look at West Virginia, the average consumer has a surplus of about $10,000 on average to afford the average priced home.

The worst of it all is actually Hawaii, where the average consumer is in a deficit of about $168,000 in terms of affording an average price home. California is likely no surprise. In second place is the average consumer, I should say second worst, not second place, as the average deficit for a consumer to afford an average home is $138 ,000.

So again, other than those two states, every other state around the US is showing a deficit. The Midwest deficit is not as significant as what you see on the coastlines for the US, but other than just looking state by state and understanding the deficits in these individual states, another way to look at this affordability challenge is the average mortgage payment.

The average mortgage payment, as we sit here today, and this is on a monthly basis, the 12 month moving average, so the annualized number, is $2,396. So over the course of the last 12 months, the average mortgage payment here in the United States is $2,396. To give you a reference point, at the beginning of 2021, that figure was $1,200. Our average mortgage payment is double what it was in the beginning of 2021 as we sit here today about halfway through 2024.

Now the good news is that that average mortgage payment has leveled off, it’s not continuing to rise. The growth rates showing the average mortgage payment in terms of the 3/12 or 12/12 has slowed down significantly and are getting very close to zero. I share all of this information to say, when you look at the primary concerns in the housing market right now from a consumer lens, it continues to be affordability. It’s not just on the mortgage rate, it’s also on the price.

But the good news that the Fed signaled is that they are changing their course on interest rates, which thus will be contributing to lower mortgage rates as we look at here in the future. So it’s likely that we have a little bit of alleviation in this affordability problem as we progress later this year and into 2025, at least on the mortgage rate side of this equation.

When it comes to overall Single-Family Housing in the US, we have positive growth rates in 2024, 2025 and 2026, 3.9% year over year in 2024, 4.8 and 5.2% respectively for 2025 and 2026. There’s a lot to be excited about in the housing market, especially as these rates come down and as we look out to the next few years. If you’re a home builder, be ready to take on this demand in 2025 and 2026 because it’ll be significant or if you’re someone serving the single family housing market. Now is the time to look ahead and start to prepare for all this demand that’s coming our way.

And like us here at ITR, continue to watch that Fed closely and we expect rates to come down. Seems like the Fed’s on our side at this point. So good news to come for the overall market. I hope you found this information helpful. Please remember to like and subscribe to TrendsTalk wherever you listen to your podcasts. And I’m looking forward to seeing you on the next one. Take care for now.