Trump Policy Takes Center Stage
NAHB Chief Economist Robert Dietz recently provided the following economic overview in his bi-weekly newsletter Eye on the Economy.
The Trump 2.0 administration is underway and disruption is the word of the day in Washington, D.C. The new Trump team hit the ground running, with policy action expected in the areas of regulatory reform, a smaller and more efficient federal workforce, extension of the 2017 tax cuts, tariffs as revenue generators and negotiation tools, and more to come on immigration actions and a more secure border. The sheer breadth of policy actions is a lot for the economy to digest.
Impact on the Current Housing Market
These policies will offer home builders and remodelers both positive and negative risks in the months ahead. This dual set of risks has been reflected in financial markets, with stocks valuing the focus on growth and efficiency but the bond market reflecting inflation and budget deficit concerns. As a result, investors have pushed long-term interest rates higher since last fall, with the 10-year Treasury rate in the 4.5% to 4.6% range, somewhat off the recent high of 4.8% set in January. Mortgage rates remain elevated near 7%.
Home price growth is slowing due to poor housing affordability conditions, high home prices and elevated construction costs. The Case-Shiller home price index increased at a 3.75% rate for the most recent data in November, down from a peak 6.54% growth rate in March 2024. Existing home sales volume slowed in 2024 to a nearly 30-year low, with just 4.06 million sales. Single-family inventory remains low at a 3.3-month supply.
This lean level of resale inventory continues to support new home sales volume. Sales of newly-built single-family homes in 2024 were 2.5% above the 2023 total. Inventory is elevated but justified given the lack of older homes available for sale. New home inventory stands at an 8.5-month supply, but the combined new and existing home inventory measure is just a 4-month supply, well below the balanced market threshold of six months. Nonetheless, completed, ready-to-occupy new home inventory is up 46% over the last year.
What to Expect Going Forward
NAHB projects more economic growth in the quarters ahead, albeit with some disruption in the presidential transition. There is a solid base to build on, with fourth quarter GDP growth coming in at a better-than-expected 2.3% annualized rate. Housing's share of GDP registered at 16.2% at the end of 2024.
The Federal Reserve is undecided on future risks to both inflation and unemployment and will likely hold the federal funds rate at the current top target of 4.5% until at least the third quarter. Future rate cuts will likely depend on 2025 fiscal policy actions, including the size of the deficit. Government spending cuts would help reduce long-term interest rates and be a net positive for housing market conditions.
However, home sales and building conditions will depend greatly on which policies are for negotiation (such as a proposed 25% tariff on Canadian and Mexican imports) and which policies are intended to be long-term changes to the economy (regulatory reform, for example).
Tariffs on Canadian lumber are a near-term concern, with the existing duty rate speculated to increase from a current 14.5% rate to near 30% later this summer. With an additional 25% tariff on top of that, it would put the tax on Canadian lumber at near 55%. This is why regulatory reform that reduces the cost of land development, home construction and remodeling is now even more critical for improving housing attainability.
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