US Housing Market: Q4 2024

According to the National Association of Home Builders, homebuilder confidence improved in November 2024 as the industry believes housing market conditions will improve under the incoming Trump administration and with a Republican-controlled Congress, despite the uncertainty about immigration and tariff policies. Even so, many of the housing-related stocks Morningstar covers have underperformed our broader US equity coverage since the election. Affordability remains a key challenge for the housing market, and higher mortgage rates over the last two months have likely sidelined some prospective homebuyers.

This article was adapted from the recently published report: US Housing Market Pulse: Q4 2024. Download it for free.

The number of occupied housing units in the United States is on pace to increase roughly 1% in 2024, to approximately 132 million units, which equates to 1.2 million household formations this year. While this is a noticeable step down from 2.0 million and 1.8 million household formations in 2023 and 2022, respectively, it is still modestly above the 10-year average of 1.1 million annual household formations.

At the end of the third quarter of 2024, there were 86.6 million owner-occupied units, 0.7% higher than the year-ago quarter, and 45.5 million renter-occupied units, up 2.5% year over year. Considering inventory of existing homes for sale remains below average in many markets, and a record number of multifamily units set to be completed over the next year, we think renter-occupied growth will continue to outpace owner-occupied growth as it did over the last five quarters.

Morningstar projects single-family housing starts will increase by nearly 7% in 2024, to 1,010,000 units, as homebuilder sales incentives and greater availability of quick move-in homes have attracted more prospective home buyers to the new construction market. In contrast, we project multifamily starts will decline 26% as developers work though the largest construction backlog in at least 50 years. Therefore, we forecast total housing starts will decline roughly 6% year over year to 1,360,000 units.

We expect single-family starts to grow at a mid-single-digit percentage over the next three years and multifamily starts to rebound in 2025. Our near-term total starts forecast is about 5% above consensus expectations. We believe that’s a function of our more optimistic outlook for mortgage rates and multifamily construction. There’s some debate about the path ahead for multifamily housing starts, but we see an undersupply of affordable housing and lower interest rates as catalysts for more multifamily construction over the next decade.

Of course, policies under the Trump administration could have implications for both housing demand and supply. Fewer immigrants would reduce housing demand, primarily for multifamily units, and reduce the supply of construction labor.

Mortgage applications for new-home purchases have increased year over year for 21 consecutive months, up nearly 15%, on average. However, fewer applications for existing home purchases have kept the purchase index in the doldrums.

According to the Federal Housing Finance Agency, as of the second quarter of 2024, 84% of outstanding mortgages had a contract rate less than 6%, and 26% had a rate less than 3%. For comparison’s sake, the average 30-year fixed mortgage rate over the last two years is roughly 6.8%, reaching a high of 7.8% in October 2023. We believe the higher rate environment has dissuaded both prospective buyers and sellers, which has reduced housing turnover. In fact, a FHFA report concluded that the so-called rate lock-in effect prevented 1.72 million home sales between the second quarters of 2022 and 2024. In response, homebuilders have built more spec homes (also called quick move-in homes) and have increased sales incentives (such as mortgage rate buydowns) to attract more buyers.

Morningstar forecasts the average 30-year fixed-rate mortgage will fall to 5.9% in 2025, 5.0% in 2026, and 4.75% in 2027, whereas consensus sees the average rate remaining around 6%.

According to the National Association of Realtors, the median sales price for existing homes increased over 40% between 2019-22, from $271,900 to $386,400. But year-over year price appreciation decelerated during the second half of 2022 and turned negative in the spring of 2023. However, after four consecutive months of year-over-year declines (March-June 2023), price appreciation has returned, averaging about 4% year over year since July 2023.

The S&P CoreLogic Case-Shiller US National Home Price Index tracks single-family existing-home prices adjusted for constant quality, so changes in home type, size, or physical characteristics don’t skew the index. The year-over-year change in the index decelerated during much of 2022 and briefly turned negative in May 2023 (down 0.4% year over year), but the index has increased by a mid-single-digit percentage since the fall of 2023.

Homebuilders have used sales incentives, base price reductions, and smaller floorplans and lot sizes to make homes more affordable, and these actions have buoyed new-home sales. According to the National Association of Home Builders, the share of builders offering incentives (such as mortgage-rate buydowns) in November was 60%, and 31% of homebuilders reported lowering base prices by 5% on average. Over the near term, we suspect homebuilders will continue to offer more sales incentives to reduce the supply of unsold spec homes. That said, homebuilders will likely be able to pull back on incentives as mortgage rates subside.

Morningstar likes Lennar, A.O. Smith, Wayfair, Sun Communities, and Canfor as 2024 comes to a close. Lennar offers the best relative value in homebuilding and A.O. Smith looks to be undervalued. Download the free report from which this article was adapted to read more about valuations, picks, and coverage.

Additional topics covered include:

• Homebuilder Data
• Consumer Health and Sentiment
• Repair and Remodeling Spending

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