The 2024 housing market outlook: Lock-in effect, interest rates and the labor shortage

In this 2024 macroeconomic update, Buildertrend’s in-house expert, Mathieu Dubeau, Ph.D., breaks down the latest construction market trends home builders and remodelers need to know about. Mathieu is a staff applied scientist here at Buildertrend.

As we usher in the year, the residential construction industry finds itself at another economic turning point.

The lock-in effect, ever-changing interest rates and the ongoing labor shortage are creating a difficult landscape for the construction and real estate industries. Compared to the COVID-era – marked by low interest rates, high real-estate transaction volumes and increased material prices – we face two new challenges: a housing shortage and affordability.

These struggles are not new, but their effect is being felt more acutely due to the increasing cost of homes. This is driven in part by increasing costs of labor and material supplies, but also by historically high interest rates. Tackling these crises head-on will require nothing short of a transformation in the industry.

The connection between the labor shortage and the housing shortage

Despite an encouraging increase in employment within the construction industry – with workforce employment peaking at 8.03 million as of the latest tally in December 2023 – this data point still doesn’t tell the entire story.

Although employment is improving, wages in construction are still increasing by too much due to the continued shortage of skilled labor. In order to bring employment rates and wages into balance, there will need to be a strategic expansion in the workforce. This is part of a broader economic growth in the U.S. that continues to keep the federal unemployment rate at historical lows.

Full employment and continued positive growth in the overall workforce is a tension that will work against the Federal Reserve’s ability to reduce interest rates in the short term – something to keep a close eye on in 2024.

The push and pull factors here cannot be understated. There’s a dire shortage of housing in this country that requires swift mobilization on the one hand, but on the other hand, inflationary pressure could increase if that happens too quickly and outpaces labor and supply chains – driving costs up further.

Relationships between skilled trades and general contractors have never been a more important factor in determining whether a job is completed on time. This is one of the places where technology can make important connections between trades searching for jobs and general contractors looking for quality craftsmanship.

In 2024, if you’re a builder looking for skilled labor or vice-versa, be on the lookout for tech solutions that can help bridge the gap. This can make all the difference for timely job completion.

Optimism in the housing industry despite economic challenges

Key residential building indicators share a similar story to the growth in the construction labor force.

The data collected on housing starts for single-family homes suggests a resilient demand for home ownership, despite economic headwinds. In contrast, multifamily starts appear to be leveling off, reflecting a market that may be reaching its peak.

This could have multiple contributing factors related to zoning laws and falling demand for luxury high-rise apartments. Zoning laws, which have historically favored single-family housing, remain difficult to change in many cities. This may be pinching the multi-family housing market as we see in this case study of Atlanta.

Atlanta case study

While Atlanta has been one of the hottest housing markets in the nation over the past few years, it’s one of the only large metros we’re forecasting a slowdown for in 2024. This is partly due to the slow speed of rezoning.

Also, many of the newer multi-family housing builds completed over the past few years aimed to capitalize on high rents on the luxury end of the market – not on solving or building more affordable housing. With demand for luxury apartments declining and many apartments now sitting empty, perhaps shifting the focus toward building affordable multi-family units for low- to moderate-income earners will take root in 2024.

The ebb and flow of building permit issuance shows the industry’s measured optimism in the face of fluctuating market signals. We observed an increase in single-family starts and permits submitted throughout 2023 and are forecasting this increase to continue in 2024 across most large metropolitan areas.

What is the lock-in effect?

The current housing market dynamics are heavily influenced by the lock-in effect.

The lock-in effect is caused by current homeowners showing reluctance to move because their current mortgage rate is significantly lower than current market rates. This leads to a large decline in available housing. And with median home prices continuing to rise, we’re seeing a clear signal of a supply demand imbalance.

In June of 2023, Redfin reported that 92% of homeowners had a mortgage rate below 6% and a whopping 62% percent had a mortgage rate below 4%.

What was stated in our previous economic blog post still remains true: “With the overwhelming percentage of homeowners locked into low-interest mortgages, we foresee a future increase in remodeling opportunities.” We also believe that despite high interest rates, home values will increase in 2024. How much they increase will largely depend on the movement in interest rates. Home values will not see the rapid growth they did during the pandemic.

Interest rates, inflation and the consumer’s dilemma

The instability of interest rates, especially those associated with 30-year mortgages, has cast a dark cloud over the housing market.

The Consumer Price Index – a measurement of inflation ­– echoes these fluctuations, adding layers of complexity for consumers and investors alike as they navigate the housing economy. As previously mentioned, the tension between supply and demand in the housing market has created difficult conditions to navigate at the macro level.

The Federal Reserve’s fear is that reducing interest rates too quickly will overcook the economy and promote inflation. Thus far, 2024 seems to be a year where economic growth will outpace inflation, bringing relief to many who were heavily impacted by the nearly 17% growth in prices since 2020.

Even still, the volatility of the past few years has shown just how important accurate financial reporting is to continued business success. With analytical data and insights, builders are primed to make better business decisions and identify potential issues before it’s too late.

Carrying these best practices into this new emerging business landscape remains a key competitive advantage.

A new era for construction and real estate

The residential construction industry’s path forward in 2024 is likely to be filled with challenges, but there are also plenty of opportunities for those willing to embrace change.

The use of advanced software solutions like Buildertrend not only helps business operate more efficiently, but also strategically positions them to thrive in an era of uncertainty. By leveraging technology, the construction industry can break down traditional barriers, fostering a more robust, agile and responsive ecosystem capable of meeting the housing needs of tomorrow.

As we navigate these uncharted waters, the blending of innovation with strategy and collaboration will bring in a new dawn for residential construction, promising a future where the industry not only survives but flourishes.

About the author:

Mathieu Dubeau earned his Ph.D. in Political Science from the University of Washington, Seattle in 2021. At Buildertrend, he joins his passions for economics and research with the Buildertrend mission of empowering builders in the residential construction industry.