While doom and gloom headlines continue to abound, there’s an array of data to suggest that many building products manufacturers can actually operate with some sense of optimism about 2024 and 2025 outcomes.
Let’s take a look at a handful of indicators suggesting a more positive housing market outlook than many of the headlines may purport.
Single-Family Residential Builder Confidence Returning to Positive, From Being Negative
While in 2022, builder confidence declined rapidly as measured by NAHB’s Housing Market Index (HMI), the first half of 2023 have seen building confidence increase and return to a slightly positive sentiment. As of June 2023, builder confidence is at 55 out of 100, compared to a recent low of 31 in December 2022. For context, builder confidence was 55 out of 100 in July of 2022.
Further, despite a temporary dip in single-family housing starts during the first half of 2023, the outlook for the remainder of 2023 and into 2024 remains positive as forecasted by the National Association of Realtors.
Active New Single-Family Building Permitting and Housing Starts
According to data released by the U.S. Census Bureau and HUD, 1,491,000 building permits were issued in May of 2023, 897,000 of which are for single family residential construction. This is up 4.8% from the prior month - April 2023 - and down 13.2% from last year - May 2022.
Permitting is a leading indicator to understand the supply of new homes that will be available in the next 8-12 months.
As of April 2023, the U.S. Census Bureau estimates that
- 683,000 new single-family houses were sold
- 155,000 were permitted, but not started
- 266,000 were under construction
- 262,000 were completed
Total permits and starts are forecasted to increase each quarter as we head into 2024. The National Association of Realtors forecast is to hit 1,020,000 single-family residential starts by Q2 2024.
Current Attitudes of Builders
Genuinely understanding the psychology and sentiment of home builders is as important, or more important, than understanding the financial headlines and housing metrics. We must understand what builders are feeling, why they are feeling that way, and how it’s impacting their behaviors.
Keep in mind, not all builders are the same. More sophisticated, larger builders or commercial builders behave much differently than a smaller builder. The opportunities, means of communication, product factors, and information needs that each has will vary, so it’s critical to understand the type of builder you’re trying to reach so you can adjust your product and marketing approach.
Grant Farnsworth, President of The Farnsworth Group noticed an interesting trend being reported by building product manufacturers while presenting at the 2023 NAHB’s Spring Leadership Meeting and Legislative Conference:
“I took a simple poll, and no one in the room was pessimistic about the next 2-3 years for building products. The strong majority were somewhat or extremely optimistic with only a few being neutral. This is consistent with one on one conversations we’re having. “We’re actually doing better than we thought,” is a common sentiment coming from building product manufacturers right now. There’s this idea that many expected the bottom to fall out, and it just hasn’t. Some are seeing growth or starting to see increased sales over the past couple of months from builders.” - Grant Farnsworth
Remodeling Contractor Confidence
Beyond just understanding builder sentiments, you should have a solid pulse on remodeling contractor sentiments as well.
That’s why each quarter, our team at The Farnsworth Group tracks business confidence among five trades: remodelers, exterior contractors, mechanical contractors, finish contractors and landscape contractors.
From the Q2 2023 study results, we see that while backlogs are holding and contractors are busy today, they are becoming increasingly sensitive to their business prospects of tomorrow.
The decrease in contractor’s reporting confidence in gaining new business in the next 6 months is in line with the Joint Center for Housing Studies findings through their Leading Indicator of Remodeling Activity (LIRA).
The LIRA forecasts residential remodeling activity which, historically, remains less volatile than new home construction activity.
This comes as the building products industry is coming off of a season of entirely unexpected demand and high growth outcomes. These marks achieved in 2021 and 2022 cannot be expected to become the new normal. Those high marks were achieved due to market distortions from stimulus payments and various forbearance programs. Rather, fixing our eyes back on the pre-covid norm and resetting our expectations to typical growth rates projected from 2018 and 2019 levels will yield a more realistic forecast for 2023 and 2024 outcomes in order to inform your business strategies.
Because home values remain high, the Joint Center for Housing Studies (JCHS) anticipates that remodeling will still perform well overall, but JCHS expects YoY growth slowing in 2023 and projected to land near $458 billion in homeowner spending by Q1 of 2024, still a significant market high.
Further, after the marked increase in YoY growth in 2021, the Home Improvement Research Institute’s forecast for 2023 through 2027 shows more increases in opportunity in the Pro market compared to Consumer.
Multi-Family Housing Starts Expected to Decline While Single-Family Housing Starts to Increase
As market conditions create a more restrictive borrowing environment coupled with lower cap rates, the incentive for investor driven multi-family unit development has been reduced.
This is making way for single family construction and remodeling to be more viable pursuits.
Active New Multi-Family Building Permitting and Housing Starts
According to data released by the U.S. Census Bureau and HUD, 594,000 multi-family units were started as of May 2023.
Permits issued for 2-4 unit multi-family projects decreased 10.3% from the month prior - April 2023 - and decreased 13.3% from the year prior - May 2022.
In May, permits issued for 5+ unit multi-family projects increased 7.8% compared to April 2023, but decreased 11.9% compared to the year prior - May 2022.
Existing multi-family units that are currently still under construction will come to market as available inventory in the next 12-24 months.
Rental Demand Has Softened
As of the first half of 2023, rental demand has softened and rising vacancy rates paint a clearer picture to understand why there has been a pullback on investments into new multi-family residential units.
The lack of financial incentive to invest into new built-to-rent units will continue to reduce further investment into the multi-fam market for the time being, resulting in a the very least a deceleration in new multi-family starts, if not fully extending into a full trending decline in starts.
There are also a lot of commercial office buildings still under occupancy that may be ripe for retrofits once current tenant agreements expire.
In order to meet buyer demand, single-family residential builders are primed for continued success in the coming years, coming back to why builder confidence is rebounding.
Next Steps for Improving Your Brand’s Success in 2024 and Beyond
For industry insights on what this means specifically to your business and what to be paying attention to going forward regarding your customers, brand and products, simply schedule a consultation.
You can also download this year's Building Products Customer Guide below for a deeper look at builder's purchase behaviors and business sentiments.