What’s actually happening in the housing market, according to top housing economist Ali Wolf

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In 2023, national existing home sales hit their lowest point since 1995 due to spiked rates, making the “switching costs” of moving simply too high for many homeowners who would otherwise like to sell and buy something else. However, sales of new homes was another story. Though they declined from the highs of the pandemic housing boom, they remained largely consistent with the pre-pandemic trend. All things considered, 2023 was a solid year for publicly traded homebuilders .



Has that resiliency for single-family construction carried over into 2024? What headwinds and tailwinds might be ahead?



To gain insights into the current state of the single-family home construction market, ResiClub reached out to Ali Wolf , chief economist at Zonda , an analytics firm specializing in new construction:



Among the 10 largest publicly traded homebuilders tracked by ResiClub , they collectively recorded 77,255 net new home orders in Q1 2024 . That’s up 18% year-over-year. Is it fair to say that single-family builders are having a strong start to 2024? And if so, what’s driving it?



Absolutely. New home sales have had a good start to the year, especially with interest rates holding in the high-6%s and low-7%s. The new home market has thrived in today’s market given the lack of resale supply, the narrowing price spread between new and existing homes, and builder incentives. Importantly, though, two different housing markets have emerged: that of larger, mostly public builders, and that of smaller and mid-sized builders. In the immediate market, larger builders have been able to be more aggressive with incentive usage when needed, including buying down the mortgage interest rates well below what a smaller builder is willing and able to do. Larger builders have also been able to be more aggressive in their land acquisition, intending to increase their community count both this year and next year. In the land market, the bigger builders have [priced] out some of the smaller builders.







According to Zonda’s data, what are the strongest—and softest—new construction markets right now?



We track the market via our Zonda Market Ranking. The ZMR looks at sales adjusted for seasonality and supply and puts the numbers in context compared to history. The national market came in as “slightly overperforming” for April. Markets like Cincinnati, Columbus, parts of Texas, inland Southern California, and Philadelphia are currently the strongest markets according to the ZMR. We see San Jose, San Francisco, and Salt Lake City as the weakest new home markets, with each falling into our “slightly underperforming” category.



Over the past year, we’ve seen a big jump in active resale inventory sitting on the housing market in Florida. That’s particularly true in Southwest Florida , in areas like Cape Coral and Sarasota that got hit hard by Hurricane Ian. Has that inventory jump softened the new construction market in Florida?



The rise in inventory in Florida has definitely caused rumblings in the new home industry. We’ve had builders reach out to compare notes with what other builders are saying. The interesting caveat is that most builders think this will impact sales but haven’t seen a dramatic downshift yet. In fact, only 1% of builders in our latest survey told us they have “a lot” of resale competition today.



I attribute builders holding up better in Florida so far to the fact that some sellers are selling for insurance reasons. If someone is looking to buy in Southeast or Southwest Florida, they will find that new homes come with a much lower home insurance bill than buying existing ones.



In addition, some of the increase in supply comes back to the new laws related to existing condo structures and the fear of getting hit with a large bill to upgrade the building. For those looking to purchase a home, a new property may feel safer (both financially and structurally) compared to an existing one.



Not long after mortgage rates spiked in 2022, buydowns became the incentive of choice among many of the largest homebuilders in the housing market. Are they still leaning into buydowns, and how could that change if mortgage rates fell?



Builders are still using incentives as a marketing tool, but that doesn’t mean all consumers are taking them. Oftentimes, true entry-level buyers opt for mortgage rate buydowns to help them qualify for their loans. Higher-end buyers will often be more enthusiastic about [builders offering] funds towards options and upgrades. Some [buyers] have the mentality that if they are going to pay today’s [high] prices for a home, they want to have a great product to show for it. We often wonder how long builders will use incentives and the answer is simple—as long as they have to!



While I can access a lot of data on the publicly traded homebuilders, I don’t have as clear of a picture on the small builders. How are they doing right now? And are big builders taking away market share from them?



There has been a big market share shift. In the mid-2000s, public builders represented 25% of the total sales. Today, they represent 50%. This makes sense if you think about it. Bigger builders have better access to land, right of first refusal on some land deals, economies of scale, a more consistent workforce, and an ability to be more aggressive with incentives. Not to mention the M&A we’ve seen over the past few years with even more dry powder waiting on new deals. Small builders are still enjoying the new home market pulling market share from the existing home market, though.







What’s your outlook for homebuilding and home prices over the coming year?



We believe that the new home market will remain an attractive segment of the housing market for consumers. The aging housing stock and relatively higher insurance costs on the existing home side and energy efficiency savings and turnkey product on the new home side support future demand. While I feel confident about homebuilder market share, home prices are trickier. Every time we think home prices can’t go higher, they do. In the new home market, though, there may be a period of time over the next few years where we see prices come down. This could be a function of smaller homes, locational differences, and/or select price drops.