While the overall housing market is weak, specific segments are showing strength. Custom home building, serving wealthier buyers less sensitive to interest rates, is performing well. Townhouse construction also remains strong, meeting demand for walkable, medium-density housing.
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Current real estate deliveries were financed in the 2020-22 low-rate era, causing a temporary supply glut in high-demand sectors like Sunbelt apartments. Since new construction halted in 2023, today's depressed prices offer a unique entry point before supply normalizes and rents can accelerate.
Recent housing data, including prices, sales, and construction starts, indicate the market is no longer in freefall. However, it has bottomed out at a very weak level, comparable to the financial crisis or the pandemic's peak, with no signs of a strong recovery.
The difference in home price trends between US regions is not about weather or jobs, but housing supply. States in the South and West that permit widespread new construction are seeing prices fall, while "Not In My Backyard" (NIMBY) states in the Northeast and Midwest face shortages and rising prices.
With high interest rates freezing the existing home market, homebuilders are successfully competing by using their own margins to "buy down" mortgage rates for customers. This strategy allows them to continue selling inventory even when affordability is broadly challenged.
A significant housing market recovery requires a substantial and sustained improvement in affordability. Analysts estimate a 100-basis-point drop in mortgage rates (e.g., to 5.5%) is needed to trigger a meaningful pickup in sales. However, this growth is not immediate; sustainable increases in sales volumes typically materialize a full year after the affordability improvement occurs.
While lower interest rates seem appealing, they often fuel intense market competition and bidding wars. Higher rates can thin the herd of buyers, providing an opportunity for those who can still afford to purchase to secure a deal with less pressure and more negotiating power.
The number of 25-34 year olds living with parents has doubled from 10% to 20% since 2000. This represents a significant "housing deficit" of unformed households, which will drive strong demand for new housing as soon as affordability improves.
To maintain sales volume, two-thirds of builders are using incentives, with many cutting prices outright. This has led to a rare market inversion where the median new home price has fallen below the median resale price, a phenomenon seen only a few times since the 1940s.
Three-quarters of US household wealth is in homes. BlackRock's Rick Reeder argues that a healthy housing market is critical for the broader economy, as it unlocks labor mobility (allowing people to move for jobs) and creates construction jobs. Lower mortgage rates are key to stimulating this velocity.
Despite billions in funding for startups like Katera, the concept of mass-producing homes in factories has repeatedly failed. The construction industry's inherent need for site-specific customization and its complex value chain prevent it from achieving the efficiencies of scale and standardization seen in other manufacturing sectors.
