The outlook for residential construction from mid-2024 through 2025 appears cautiously optimistic, influenced by key indicators such as housing demand and mortgage interest rates.
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Housing Demand
Demand for housing remains robust due to several factors. First, demographic trends continue to support housing needs, with millennials aging into prime home-buying years and overall U.S. population growth driving demand. Millennials, the largest living adult generation in the U.S., are now entering or are in their 30s, a period traditionally associated with homeownership. According to the U.S. Census Bureau, millennials accounted for 37% of homebuyers in 2023, a trend expected to continue as more of this cohort seeks to establish permanent residences.
Additionally, the U.S. population is projected to grow from 332 million in 2022 to approximately 350 million by 2030, further fueling housing demand. According to projections from the National Association of Realtors (NAR), housing demand is expected to remain strong, driven by both first-time buyers and existing homeowners looking to upgrade or downsize. While sales of existing homes are rising, so is the demand for new homes, which NAR is projecting to increase by 6% in 2024.
Moreover, the trend of remote work and the desire for more space has driven many to seek suburban and rural homes, increasing demand for new construction in these areas. A survey by the National Association of Home Builders (NAHB) found that 60% of builders reported higher demand in suburban markets in 2023, a trend likely to continue as remote and hybrid work arrangements become more permanent. These demographic and lifestyle shifts underscore the enduring and evolving demand for housing, supporting a robust residential construction market moving forward.
Mortgage Interest Rates
According to the current Mortgage Bankers Association (MBA) weekly survey, the average 30-year fixed mortgage rate is now around 7%, with a low of 6.58% and a high of 7.9%. Mortgage interest rates, which have decreased from their 2023 peak, influence affordability and housing market dynamics. The current level is considered attractive for potential homebuyers, supporting continued demand and construction activity in the residential sector. And if inflation continues to decrease, mortgage interest rates should come down as well, further increasing the demand for new residential construction.
Market Dynamics
Factors affecting market dynamics in the residential construction sector include persistent post-COVID-19 supply chain disruptions, labor shortages, evolving buyer preferences, economic conditions, and low existing housing inventory. All of these are influencing the demand for new residential construction in 2024, which is expected to maintain upward momentum and create opportunities for growth in the industry.
- According to the U.S. Bureau of Labor Statistics, the Producer Price Index for residential construction materials, particularly for lumber, steel, and concrete, increased by 8.9% year-over-year as of early 2024.
- Labor shortages remain a critical issue in the construction industry. The U.S. Chamber of Commerce reports that 62% of contractors are experiencing difficulty finding skilled labor, a trend that is expected to persist throughout 2024.
- The shift in buyer preferences, particularly toward suburban and rural areas, is also influencing new residential construction demand. The National Association of Home Builders (NAHB) reports a 12% increase in new single-family home construction starts in suburban and rural areas compared to urban areas.
- Decreases in mortgage interest rates support affordability and encourage homebuyers to invest in new construction. Additionally, job growth continues, and the U.S. economy is projected to grow by 2.2% in 2024, according to the International Monetary Fund (IMF). These economic factors enhance consumer confidence and spending power and further stimulate housing demand.
- The existing housing inventory remains low, which is driving demand for new homes. According to Zillow, the inventory of existing homes for sale is down 20% compared to pre-pandemic levels. This shortage is pushing more buyers towards new construction as they struggle to find suitable existing homes. The NAR expects the inventory constraints to continue, further fueling the demand for new residential construction.
Closing Thoughts
Residential builders are cautiously optimistic about the housing market despite lingering high construction costs and supply chain issues, according to the National Association of Home Builders. The outlook for residential construction from mid-2024 through 2025 is positive, driven by sustained housing demand, relatively low mortgage interest rates, and supportive economic conditions. And builders are adapting to some of the challenges and potential volatility in the residential housing sector by leveraging technology and focusing on more efficient construction methods, fostering growth in new housing starts and contributing to the overall expansion of the residential construction sector.
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