Hardware Retailing The Industry's Source for Insights and Information
Interest rates rose in 2022 and 2023, causing single-family home production to fall. But as the Federal Reserve is on track to cut interest rates during the second half of the year, production should begin its upward path, according to the National Association of Home Builders (NAHB).
“While the Fed’s fight against inflation is building progress, the lingering inflation challenge is housing inflation,” says Robert Dietz, NAHB chief economist. “Shelter inflation—rent and homeownership costs—are still rising at a 5.4% rate, and for the past year, more than half of overall inflation in the economy has been sheltering inflation. The only way to tame shelter inflation, and get overall inflation lower, is to build more housing.”
There is currently a 1.5 million housing unit shortage, but increasing the nation’s supply will help tame inflation and ease housing affordability.
NAHB is forecasting two or three interest rate cuts, which should put mortgage rates in line with pre-pandemic rates.
“By the end of this year, NAHB projects mortgage rates will be below 6.5% and by the end of 2025, we expect rates to be in the high 5% range,” Dietz says. “This is good news for builders, housing demand and housing affordability.”
As the homebuilding market rebounds, it will put stress on the supply chain as it tackles higher prices and material shortages.
“Homebuilders continue to contend with elevated construction and regulatory costs,” Dietz says. “Regulatory costs, which include complying with building codes, zoning issues and other costly challenges, make up almost 24% of the final sales price of a newly built single-family home, or $93,870 per new home.”
NAHB surveys the regulatory costs of home building every five years and the latest survey shows that regulatory costs for an average home built for sale increased by 11% from 2016 to 2021, faster than inflation.
For a deeper dive into how current economic conditions will impact the homebuilding industry, NAHB assistant vice president for forecasting and analysis Danushka Nanayakkara-Skillington shares her insights here.
