Current market conditions are driving different customer behaviors than we saw back in 2021 and 2022. Themes in customer behavior that began to emerge in 2023 will continue to become more pronounced in 2024 shopping and purchasing behaviors.
In recent years, out of necessity, Builders and GCs discovered the relative ease and satisfaction of trying new suppliers and brands, and they have gained a certain level of comfort to try substitute products or shift to different distribution channels to suit their needs at the moment. In step with B2C trends, B2B contractors are adopting time saving and budgetary measures for project management, job site delivery, and installation.
For building materials manufacturers, these construction industry trends present unique opportunities to rethink your offerings’ perceived value to customers, according to the 2024 Building Products Customer Guide by The Farnsworth Group and Venveo. Retaining customer loyalty will be as much a measure of success in the years ahead as acquiring new customers.
Here is a closer look at the macro-economic factors currently affecting the building materials industry and the 2024 outlook for builders, remodelers, and GCs.
Macro-Economic Outlook for 2024
National Economic Shrinkage
The national economy continues to show signs of slowing down. The Conference Board's leading economic index declined to 103.9 in October; this continues the monthly declines for every week this year. Of course, certain markets will slow more than others, and some markets will continue growing. Overall, though, the highs of 2020 through 2022 are certainly in the rear-view mirror for a time.
Consumer Spending Has Been Holding Despite Real Disposable Incomes Weakening
Fortunately consumer spending remains solid but is being driven by a reduction in savings rates and credit card usage. At this time, it appears holiday spending is remaining strong. At some point, consumers will have to tighten up their wallet, which will certainly slow GDP down entering into 2024.
Real disposable income also continues to weaken with a 0.1 percent decline month over month. Year over year gains and disposable income has now slipped to 3.5 percent according the The Home Improvement Research Institute's December 2023 Economic and Industry Update. Quite simply, real disposable income is not keeping pace with core inflation, and thus consumers' real spending power continues its decline.
Will Interest Rates Increase or Decrease in 2024?
Inflation levels are remaining relatively high, while unemployment remains low. The combination of these two metrics may delay any reduction of interest rates by the Federal Reserve until mid-2024. The pressure of high interest rates will certainly have an effect on consumer credit spending as credit cards interest rates rise into the mid 20% range.
2024 Outlook for the Housing Market
Single Family Housing Starts and Resale Forecasts for 2024
Mortgage rates nearing 8% have finally begun to have an effect on the housing market.
According to reporting by the National Association of Builders, single family housing starts in 2023 have been about 10% lower than in 2022, forecasted to be within the 900K to 920K unit rate. This compares to a 2022 level of over 1 million units.
However, 2024 forecasts are looking up. As of December 2023, most analysts are forecasting an increase in single family starts next year. Depending on the source, single family starts are forecasted to increase between 5-12% and multi-family starts are forecasted to decrease 12-18%, with existing home sales down 4% in 2024.
High interest rates and lack of existing home inventory have finally begun to influence existing home sales due to "the lock-in effect". The October 2023 seasonally adjusted annual sales were 3.38 million units according to the National Association of Realtors. This is down significantly from 3.96 million units in the fall of 2022.
Simply put, little inventory equals fewer sales.
It appears that mortgage rates of 7-8% combined with sustained high home prices from low inventory levels created the threshold which finally caused the consumer to pause. This housing market will be under continued pressure until such times as rates fall back into the mid 6% range assuming current housing prices hold relatively constant.
How Forces of the 2023 Housing Market Have Impacted First Time Homebuyers
First time homebuyers have been stretching to afford payments, and both builders and smart resellers have been significantly helping with the challenge facing these buyers who need to either amass a size-able down payment, get a break on interest rates, or ideally both.
It seems right now that the new single family housing market is going to continue driving forward while first time homebuyers are able to squeeze out about $2,400/mo payments.
Assuming the purchase price of the home is $400,000 and the loan term is 30 years, here’s a look at what a first time homebuyer’s monthly payment outlook is based on a simplified range of options they have in the current market:
- 3% ($12k) Down, 8% APY = $2,847/mo
- 3% ($12k) Down, 6% APY = $2,326/mo
- 20% ($80k) Down, 8% APY = $2,348/mo
- 20% ($80k) Down, 6% APY = $1,919/mo
(Note: This simplified look does not include other compulsory monthly costs, such as PMI and taxes.)
At an option where the monthly minimum payment is $2,400/mo plus additional, compulsory cost of ownership line items, the typical household needs to earn roughly $86,000 to $115,000 per year in order to reasonably enter the current housing market.
This simplified look at first time homeowners' options makes it clear why the move to offer rate buy-downs from near 8% terms down to roughly 6% terms, by public builders especially, has been keeping housing stock moving despite the high house prices and high interest rate market environment; these first time homebuyers can get in the market with a 3% down payment on 6% interest terms versus a 20% down payment on 8% interest terms for roughly the same monthly payment.
Thus, any sort of market changes in 2024 that create options for homeowners to get into the market more favorably (i.e., job creation, lower inflation/interest rates, lower home prices, more housing inventory) will drive increased demand, and any continued market changes that add more strain (i.e., job losses, higher inflation/interest rates, higher home prices, less housing inventory) will drive decreased demand.
Builders have been responding to sales pressures by cutting prices and offering sales incentives. According to findings in the NAHB/Wells Fargo HMI, “in November [2023], 36% of builders reported cutting home prices, up from 32% in the previous two months. This is the highest share of builders cutting prices during this cycle, tying the previous high point set in November 2022. The average price reduction in November remained at 6%, unchanged from the previous month. Meanwhile, 60% of builders provided sales incentives of all forms in November, down slightly from 62% in October.”
Home Improvement Market
The slowdown in existing home sales is now taking the same toll on home improvement spending. As has been documented for years, consumers spend significantly more on home improvement in the month prior to selling a home as well as after moving into a new home (particularly an existing home move in).
Due to this decline from housing stock turnover, the Home Improvement Research Institute (HIRI) is currently estimating a decline of 1.8% in the building products market in 2024.
Ultimately, the near-term future of both consumer and pro spending on home improvement activity may well depend on the speed in which both interest rate and inflation decline in 2024. Declines in both of these macro-economic areas will allow the household to act upon pent up demand that will continue to build in 2024, when the number of new household formations is expected to continue rising.
Perhaps more importantly, rate declines will have a positive impact on consumer confidence, which recently has been a more telling indicator of consumer spend. One of the worst things for home improvement is “uncertainty”, and there is plenty of it in today’s market putting downward pressure on pros to deliver in a budget sensitive market.
Planning for Builders’ Needs
Building materials manufacturers must be prepared with the innovative offerings, quality product choices at competitive prices, convenient distribution channels, and customer-centric marketing methods in coming years to meet builders where they’re at during any challenging economic conditions that force builders to make trade-offs in their supplier and product selections.
Top priorities for builders in 2024 will be:
- Tightly controlling project costs
- Tightly controlling project timelines
- Managing project quality and client expectations, while employing less skilled workers
- Finding and winning new business from a smaller pool of prospects
While these topics are constant on the minds of builders, remodelers, and GCs, controlling project costs and timelines is an even more pressing issue for them in 2024. This is because the cost of credit remains high and buyer sentiment has created an environment where contractors must compete more fiercely to win new business.
Based on findings from the 2024 Building Product Customer Study, nearly all builders and remodelers have had to increase the prices they charge clients based on their own rising material and labor costs. With shrinking and more competitive project demand will come a forced reversal where the contractors who can find ways to be profitable while decreasing close rates will win more in a smaller pool of prospects.
Further, 2 in 3 builders and remodelers are still experiencing some level of material availability issues, which creates headache, hassle, and increased overhead and hard costs for contractors to wrangle on each project. Availability has shifted from being a challenge across all building materials to a variable across product categories. Availability also increases in importance as with larger projects and larger contractor firms. This reality is also driving 1 in 4 builders and residential remodelers to purchase a different product than is immediately available, and 9 in 10 are satisfied with making the switch.
While availability challenges still remain, the cause of product shift has now been overtaken by budget. As we stated this time last year, Price is the new Availability for 2023, and we expect that will continue well into 2024 as Homeowners put downward pressure on Pros to deliver at a reduced budget that brings them confidence to spend.
To learn more about what builders are doing and thinking when it comes to purchasing building materials in 2024, simply request access to the latest version of the Building Products Customer Guide:
