Chief Economist for Zonda, Ali Wolf, gave an informed talk to C-suites at NKBA KBIS 2023 Executive Forum about the state of the economy and its impact on real estate. 

Key Takeaways:

• Chief Economist Ali Wolf reported that consumers were positively responding to lower rates and that confidence was slowly growing.
• When buyers were asked what rate they were willing to pay and able to get fixed rate buydowns, over 30 percent said it would need to be in the high 4s.
• Builders are using strategies to encourage buyers to move, such as helping with home prices and affordability with size, finishes, locations and other product changes.

At KBIS 2023, owned by NKBA, NKBA’s CEO Bill Darcy hosted the Executive Forum, where he invited Ali Wolf, Chief Economist at Zonda, to speak to a packed room of industry C-suites about real estate and the economy. Though the economy is improving, and inflation is now beginning to slowly decline, Wolf set the tone for the talk by conveying that not enough progress had been made yet. In her presentation, she provided an informative agenda that discussed critical topics such as the state of the economy, housing trends, buyer considerations and the economic forecasts for 2023 and beyond. 

Housing Trends

Wolf reported that consumers were responding to lower rates with cautious optimism, with confidence slowly growing. Even with the volatile financial markets, mortgage rates were below 7 percent for 11 weeks, though they would have been closer to the 5 percent range if adjusted to historical averages. Wolf also reported that there was an outperformance in the eastern U.S. compared to the western U.S. — a markedly stark difference in the average sales rate.

Wolf went on to point out that, though economic uncertainty, affordability and lower prices are all reasons why buyers wait to buy, there are solutions that can help in encouraging sales, such as fixed-rate buydowns, incentives and price cuts. When buyers were asked what rate they were willing to pay and able to get fixed rate buydowns, over 30 percent said that it would need to be in the high 4s, 20 percent in the low 5s and 12 percent in the mid 4s. The number one reason the data shows renters were still renting was that they were waiting for prices to drop. 

It’s important to note that, though sales and traffic are far lower than they have been in the past few years, they have been increasing since December, as is typically seasonal — with 38 percent of builders reporting that, so far, the traffic had been stronger than expected. 

The Impact of the Economy on Buyers and Builders

Wolf said that buyers are hesitant to move right now — though luxury and relocation buyers are an exception, and there are buyers who aren’t as cost-conscious, such as international buyers. But when it comes to buyers most negatively impacted by the state of the economy, like entry-level, lower-income and local buyers, builders must strategize about what needs to be done to encourage them to move. Builders can’t control things like lower land prices, material costs, regulation fees and labor costs — but a combination of factors can help with home prices and affordability, such as size, finishes, options, locations and other product changes.

On a more positive note, when builders were asked whether they had seen any improvements in material costs, a resounding 81 percent said “yes.” Most builders reported moderate or modest improvements to the industry, with supply disruptions improving. When builders were asked if they were lowering costs and sales prices, 38 percent said only on smaller homes, 37 percent said they were not lowering costs/sales prices at all and 25 percent said they were paring back features.

Economic Forecasts

Wolf ended her talk by saying that, thus far, the market was performing better than expected, with housing slowing quicker than the rest of the economy (after nine months of a slowdown) — which would entice buyers to come back to the market at lower rates. However, jumping to the conclusion that housing is back for this cycle may be a little premature with fears of a recession looming.

The best-case scenario Wolf presented, for 2024, is that starts could outperform and the recession would indeed be short and mild. Demand could snap back, and builders could start to go vertical on the increased lot supply. Existing homeowners would remain in place, leaving builders as the ‘only game in town.’