Economic Forecast 2024: Reasons for Concern and Cause for Optimism

Dr. Stanley Longhofer is the Director of the Center for Real Estate at Wichita State University. Dr. Rob Dietz serves as NAHB Chief Economist. Almost 300 KCHBA members gathered to hear their thoughts and analysis at the 2024 KCHBA Economic Forecast Breakfast held on Jan. 18.

Job Growth and Participation

According to Dietz, 12 states and Washington D.C. have not reached pre-Covid job numbers, with Hawaii being the most impacted at a current 5 percent loss. Missouri sits right above Kansas in growth, but both are just under the U.S. average of 3 percent growth.

The U.S. Bureau of Labor Statistics (BLS) cites job openings have fallen overall, but not within the construction industry. In November 2023 the job openings rate fell to the lowest since March 2021. However, there is still a strong disparity between job openings and unemployment. “As interest rates went up in 2022, the job openings rate came down. That is good news for the labor market; it does mean the labor market is cooling and reduces the possibility of wage induced inflation,” stated Dietz.

However, the skilled labor shortage persists. “In any given month, the construction industry is short about 400,000 construction workers,” said Dietz. The number of open positions waned this past year, but Dietz anticipates it to pick back up as single family construction ramps up.

The labor force participation rate, the share of working adults who have a job or are looking for one, is not quite back to what it was before March 2020. “This is something we emphasize to policy makers in D.C. There are two ways to address a hot labor market: you can raise interest rates and cause businesses to higher fewer workers. That fights inflation and is the demand side approach. The supply side approach is getting more workers looking for jobs and fill the jobs,” said Dietz. “Right now, the focus is the demand side.” Dietz believes this approach and logic draws parallels with U.S. housing.

All About Inflation

According to Dietz, getting consumer inflation down to the Federal Reserve’s targeted two percent will take more time than it did going from 9 percent to 3 percent. The Federal Reserve held interest rates steady on Jan. 31. At that time, Chair of the Federal Reserve Jerome Powell did signal rates could fall in the coming months if inflation continues to cool.

Benchmark interest rates have been held between 5.25 percent and 5.5 percent — the highest in over two decades — since July. For 2024, the Federal Reserve’s own rate economic projections suggest three 0.25 percent rate cuts this year. “By the time we get to the middle of this year, the Fed is not going to be holding higher rates for longer. They’re going to be in the rate cutting cycle,” said Dietz. “Mortgage interest rates should be moving lower this year.”

Despite a tightening of federal policy, shelter costs have continued to rise. Dietz points out that for the past several quarters, shelter inflation has been over 50 percent of overall inflation growth. “Every single story about inflation should begin with the headline inflation is a housing problem,” said Dietz. “The U.S. has had a housing deficit for about a decade.” The solution is straight forward according to Dietz. “Build more attainable housing; housing is not just a housing problem.”

Dietz predicts the current interest rates of 6.8 will get down to 6.2 percent range. There is reason to believe in 2025 rates will drop below 6 percent and price in a lot of housing demand. Dietz expresses doubt we will ever see mortgage rates be 2 percent and 3 percent again.

Remodeling

Dietz predicts a soft patch for residential remodeling, but overall is a growing sector of home construction. Single family remodeling has fared well with aging housing stock, aging in place demand and the mortgage rate “lock in” effect. Dietz points to 2007 data showing remodeling with a 33 percent share of the market, rising to 39 percent in the third quarter of 2023 and predicted to rise to 45 percent in the future. Adjacent to remodeling is “teardown” construction, currently making up about 10 percent of the market with Dietz expecting a rise of 5-10 percent over the next decade or so.

Kansas City

The Kansas City population is growing faster than the rest of the United States. The national fertility rate continues to decline, currently sitting at 1.7 percent with 2.05 percent needed to hold steady. The U.S. has not seen that number in a decade, with immigration accounting for an influx in overall country population.

Reasons for Concern

On a larger scale, worldwide and domestic unease has an impact on the global trade system. Aging populations and declining growth is being seen in both the U.S. and China. Dietz says GDP is “slowing to less than a 2 percent growth rate, but the overall macro forecast is much better than what we had twelve months ago.” He points to third quarter GDP growth of 5 percent. “A year ago we were forecasting that quarter to be flat or even negative.”

When it comes to housing, the unpredictable lumber market was a major contributor to a peak year-over-year increase by 24 percent in 2021. The market has flattened out, but the problem is not solved. There have been reported higher rates of damaged building materials and incorrect products. “As single-family homebuilding rebounds this year, lumber prices will go up,” stated Dietz. There is still a 9 percent Canadian tariff on lumber, which is about a third of the U.S. supply. “We don’t produce enough lumber domestically; we don’t harvest enough timber and we don’t have enough mills in operation,” said Dietz.

Credit for builders and lenders is tightening, with some average annualized rates hitting 13 percent or 14 percent. Dietz predicts the country won’t have enough lots by the end of 2024 or beginning of 2025, resulting in volitivity pricing.

The regulatory costs continue to be a challenge in housing attainability. According to Dietz, duilding codes, land use, environmental and other rules average about 23.8 percent of the home price. This is an 11 percent gain from 2016 to 2021. The continued stacking of these costs price potential homeowners out of the market. One example is the Biden administration currently promoting a proposal that would require all FHA financed newly built homes will be required to build to the 2021 IECC code (regardless of the local code). Dietz quotes Fannie Mae and Freddie Mac, which make up approximately 70 percent of new construction financing, are currently considering this position as well.

Cause for Optimism

Supporting the idea of a strong housing deficit, rising mortgage interest rates have only slowed demand, not truly decreased it. Housing prices were not drastically impacted. Although data varies, Dietz estimates a national need for 1.5 million single family homes a year to account for population growth and replacement.

Single family permits in Missouri, Kansas and KCMO fell in 2023. In 2024, a 5 percent growth rate is expected. According to Dietz, 2025 will bring lower interest rates and additional demand from the sidelines will appear in the market.

A copy of Dr. Dietz’s and Dr. Longhofer’s presentations can be found on kchba.org. For more insight from NAHB on housing policy and economics throughout the year, head to eyeonhousing.org.

The 2024 Economic Forecast Breakfast was made possible by CommunityAmerica Credit Union and First Federal Bank of Kansas City. Thank you to our Coffee and Conversation sponsor Wilson Lighting.