Yesterday, at KBIS 2023, 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 has been made yet. In her presentation, she provided an informative agenda that discussed critical topics such as the state of the economy, current housing trends, buyer considerations, and the economic forecasts for 2023 and beyond. 

Current Housing Trends

Consumers are responding to lower rates with cautious optimism, with confidence slowly growing.  Even with the volatile financial markets, mortgage rates have been below 7 percent for 11 weeks, though if adjusted to historical averages, it should be closer to the 5 percent range.  There is also 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 asked what rate buyers are willing to pay for and able to get with 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 are still renting is that they are 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 are increasing from December as is typically seasonal — with 38 percent of builders reporting that, so far, the traffic in January has been stronger than expected. 

How the Economy is Impacting Buyers and Builders

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 asking builders if they have seen any improvements in material costs, a resounding 81 percent say “yes.” Most builders report moderate or modest improvements to the industry, with supply disruptions improving; however, some issues still linger, such as windows, appliances, and electrical transformers. 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

Thus far, the market is performing better than expected, with housing slowing quicker than the rest of the economy (after 9 months of a slowdown), which will 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, 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’.