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Flat Conditions for Custom Home Building

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NAHB’s analysis of Census Data from the Quarterly Starts and Completions by Purpose and Design survey indicates relatively flat conditions for custom home builders after a period slight softening of market share due to declining mortgage interest rates. However, post-election stock market gains should support custom building at the end of 2024 and going into 2025.

There were 48,000 total custom building starts during the third quarter of 2024. This marks a 4% decline compared to the third quarter of 2023. Over the last four quarters, custom housing starts totaled 178,000 homes, just below a 1% decline compared to the prior four quarter total (179,000).

After share declines due to a rise in spec building in the wake of the pandemic, the market share for custom homes increased until 2023 and then entered a period of retrenchment. As measured on a one-year moving average, the market share of custom home building, in terms of total single-family starts, has fallen back to 17%. This is down from a prior cycle peak of 31.5% set during the second quarter of 2009 and a 21% local peak rate at the beginning of 2023.

Note that this definition of custom home building does not include homes intended for sale, so the analysis in this post uses a narrow definition of the sector. It represents home construction undertaken on a contract basis for which the builder does not hold tax basis in the structure during construction.

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Residential Mortgages Experience Unchanged Lending Conditions, Weaker Demand in Third

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Lending standards were essentially unchanged for all residential mortgage categories in the third quarter of 2024, except for Subprime loans, according to the Federal Reserve Board’s October 2024 Senior Loan Officer Opinion Survey (SLOOS).  Demand for most residential mortgage loans remained weaker across all categories in the quarter.  Lending conditions for commercial real estate (CRE) loans were moderately tight, amid modestly weak demand as well.  However, NAHB believes that financial conditions for the home building industry should improve next year as the Federal Reserve continues along their current rate cutting cycle.

Residential Mortgages

GSE-eligible and Qualified Mortgage (QM) non-jumbo non-GSE eligible mortgages recorded a neutral net easing index value (i.e., 0) while the other five residential mortgage loan types (Subprime, Non-QM jumbo, QM jumbo, Non-QM non-jumbo, Government) were negative for the third quarter of 2024, representing tightening conditions.

Besides GSE-eligible, which posted stronger demand (i.e., positive value) for the first time since Q2 2021, and QM non-jumbo non-GSE eligible (neutral demand), all other residential mortgage loan categories reported weaker demand in Q3 2024. Weakness is less widespread than in recent quarters, however. Among all residential mortgage loan categories, falling demand is best highlighted by Subprime loans which  experienced weaker demand for 17 consecutive quarters, or for over four years.

Commercial Real Estate (CRE) Loans

Banks reported moderately tightening lending conditions for both multifamily as well as all CRE construction & development loans in the third quarter of 2024.  However, the tightening was not as widespread as in recent quarters. Results show 10 consecutive quarters of tightening lending conditions for CRE loans.

For multifamily, the net percentage of banks reporting stronger demand was -8.2% while –14.8% for construction & development loans.  Although improving, weaker demand has continued for over two years for both CRE loan categories.

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Flat Conditions for Single-Family Home Size

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An expected impact of the virus crisis was a need for more residential space, as people use homes for more purposes including work. Home size correspondingly increased in 2021 as interest rates reached historic lows. However, as interest rates increased in 2022 and 2023, and housing affordability worsened, the demand for home size has trended lower.

According to second quarter 2024 data from the Census Quarterly Starts and Completions by Purpose and Design and NAHB analysis, median single-family square floor area edged up to 2,164 square feet, just off the lowest reading since the second half of 2009. Average (mean) square footage for new single-family homes registered at 2,363 square feet.

Since Great Recession lows (and on a one-year moving average basis), the average size of a new single-family home is now effectively flat at 2,387 square feet, while the median size is about 3% higher at 2,165 square feet.

Home size rose from 2009 to 2015 as entry-level new construction lost market share. Home size declined between 2016 and 2020 as more starter homes were developed. After a brief increase during the post-COVID building boom, home size trended lower due to declining affordability conditions. As interest rates decline, new home size could level off and increase in the quarters ahead.

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Unchanged Lending Conditions, But Weaker Demand for Residential Loans in Second Quarter

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According to the Federal Reserve Board’s July 2024 Senior Loan Officer Opinion Survey (SLOOS), lending standards were essentially unchanged for all residential real estate (RRE) categories in the second quarter of 2024.  However, demand for RRE loans remained modestly weaker across all categories in the quarter.  Lending conditions were significantly tighter, and loan demand modestly was weaker across all commercial real estate (CRE) loan categories.  Nevertheless, language from the most recent Federal Open Market Committee (FOMC) suggest that cuts to the federal funds rate are imminent which will be welcomed relief for the real estate market and will help stimulate future loan activity.

Residential Real Estate (RRE)

Four of the seven RRE categories (GSE-eligible, non-Qualified Mortgage or QM jumbo, Non-QM non-jumbo, and Subprime)recorded a net share of banks reported tighter lending standards in Q2 2024 as neutral (i.e., 0%) . The other three categories, which included government (i.e., issued by FHFA, Department of Veteran Affairs, USDA, etc.), QM jumbo, and QM non-jumbo non-GSE eligible recorded a negative reading which means that more banks reported looser rather than tighter conditions.

Six of the seven categories of RRE loans showed a decrease in net tightening from Q1 2024 to Q2 2024, with the only exception being GSE-eligible which increased 1.8 percentage points.  The largest drop in the net tightening percentage occurred for Non-QM jumbo which fell 9.8 percentage points (pp) from 9.8% in Q1 2024 to 0% in Q2 2024.

All RRE categories reported net weaker demand in Q2 2024.  The survey has shown that banks have indicated weaker demand for at least 12 consecutive quarters for all RRE categories going back to Q2 2021 (Subprime leads all RRE categories at 16 consecutive quarters).

Commercial Real Estate (CRE)

Banks reported significantly tighter lending conditions for both multifamily as well as all CRE construction & development loans in Q2 2024.  However, both categories showed less net tightening than they did a quarter before, most noticeably multifamily falling 11.7 percentage points.  Nevertheless, it has been 10 consecutive quarters of tighter lending conditions for construction & development and 9 consecutive quarters for multifamily.

For multifamily, 17.5% of banks reported net weakening of demand for loans which is 16.4 percentage points lower compared to Q1 2024.  As for construction & development loans, 15.9% of banks reported net weakening of demand for loans which was little changed from the previous quarter.  Weaker demand has persisted for roughly the last two years for construction & development (10 consecutive quarters) and multifamily (8 consecutive quarters).

Special Questions

The Federal Reserve included a set of special questions this quarter which asked banks “to describe the current level of lending standards at your bank relative to the range of standards that has prevailed between 2005 and the present.”  Effectively, they are asking banks to think about the median lending standards over the last two decades and determine where do conditions today rank on this continuum.  On balance, banks indicated that the current level of lending standards is located at the tighter end of this range for all loan categories, including CRE and RRE loans.

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