Housing Demand Has Jumped

The popular business press, including the cable news channels, are awash in reports that housing demand has already jumped on just the notion of rate cuts later this year, and the jump is expected to become a surge as I have been predicting.

Remember, I have said for the last several months that when the Fed signaled inflation was headed to the 2% target rate, and even the first signs of rate cuts appeared, buyers would come flying off the benches. The reason is simple: there is a portion of the homebuying market for whom a new home is not a discretionary decision: they are pregnant and need a larger house, the husband or wife has received a promotion or new hire in a different city, or an older couple wants to start retirement, forcing the usual downsizing that most retirees seek.

Well, my expectations have been born out. For example, as has been reported throughout the popular business press, homebuilder KB Home signaled in its quarterly earnings report in January a significant improvement in homebuyer demand as mortgage rates have moderated, pointing to a strong start to 2024 for the U.S. housing market.

Their comments come as mortgage rates pull back from last year’s highs, as at press time for this column, the average rate on 30-year fixed mortgage loans stands at 6.62% a week prior – and will bump up and down a few basis points (100th of a percentage point) as it generally trends downward for the rest of this year. That is almost 40 basis points lower than the 7% rate seen in late September last year.

A Little Recent History. As mortgage rates surged in 2023, buyers pulled back due to higher borrowing costs while existing homeowners were more reluctant to sell homes they had financed at lower rates. In response, homebuilders nationwide used incentives to spur buyer interest and soften the sticker shock facing many buyers.

Some of the popular concessions included aggressive rate buydowns when the builder pays upfront to reduce the interest rate on a mortgage or rate locks, which lock in a rate so it won’t change for a certain period of time. And it worked – over the last year, shares of KB Home have gained more than 73%; over that same period, the iShares U.S. Home Construction ETF is up nearly 53%.

And this market improvement has not been lost on builders, where sentiment has surged. Mortgage rates that only recently have been well under 7% have led to a sharp increase in builder confidence to begin the new year.

Builder confidence in the market for newly built single-family homes climbed a whopping seven points to 44 in January, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This second consecutive monthly increase in builder confidence closely tracks with a period of falling interest rates.

Future Sales. The interest rate drops served to lift the future sales expectation component in the HMI into positive territory for the first time since August. Lower interest have improved housing affordability and brought some buyers back into the market.

However, as home building expands in 2024, the market will see growing supply-side challenges in the form of higher prices and/or shortages of lumber, lots and labor. This now exceeds interest rates as the biggest downdraft on builder sentiment.

All three of the major HMI indices posted gains in January. The HMI index charting current sales conditions increased 7 points to 48, the component measuring sales expectations in the next six months jumped 12 points to 57, and the component gauging traffic of prospective buyers rose 5 points to 29. The across-the-board-gains in these measures bodes well for housing in 2024.

It is important to note that housing plays a major role in the consumption of construction aggregates across the United States. While the mix of commercial versus residential can vary widely from market to market, all construction requires aggregates as an essential ingredient in construction, and housing is a big part of that.

For those producers who are exposed to the larger residential markets, expect a robust year in 2024.

AVP Index. The monthly Index further enforces what I said in our larger quarterly report, and alluded to in last month’s column in Rock Products. In both cases, I made the case for a bullish 2024 and beyond – and for the foreseeable future. This month’s metrics finally reflect that with a romping +2.4% increase in the Index in a single month, and +5.5% for the trailing 12 months.

And this month, we are adding an additional summary, which is the total gain in the Index for the last 36 months to reflect the direction of our industry – up a very robust +17.6% during the period, reflecting the strength of the market. Of considerable note is that every one of our twelve metrics that make up our algorithm were up, with only the exception of Industry Stock Market prices, which fell -.04% against the backdrop of profit-taking by investors after a walloping 44% for the trailing 12 months.

Pierre Villere

Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers and acquisitions. He has a career spanning almost five decades, and volunteers his time to educate the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter @allenvillere.

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