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Multifamily Developer Sentiment Showed Mixed Results in Third Quarter

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Confidence in the market for new multifamily housing showed mixed results year-over-year in the third quarter of 2024, according to results from the Multifamily Market Survey (MMS) released today by the National Association of Home Builders (NAHB).  The MMS produces two separate indices: the Multifamily Production Index (MPI) had a reading of 40, an increase of two points year-over-year, while the Multifamily Occupancy Index (MOI) had a reading of 75, down seven points year-over-year.

While demand for rental apartments remains strong enough to support relatively high occupancy rates in existing projects, multifamily builders and developers continue to face many significant obstacles on new projects such as higher construction costs, the cost and access to financing, and the availability of land and regulations.  NAHB forecasts multifamily construction to remain weak for another year as the market works through a substantial number of units under construction, before beginning to move back to long-term trends toward the end of 2025.

Multifamily Production Index (MPI)

The MPI is a weighted average of four key market segments: three in the built-for-rent market (garden/low-rise, mid/high-rise, and subsidized) and the built-for-sale (or condominium) market.  The survey asks multifamily builders to rate the current conditions as “good”, “fair”, or “poor” for multifamily starts in markets where they are active.  The index and all its components are scaled so that a number above 50 indicates that more respondents report conditions as good rather than poor.

Two of the four components experienced year-over-year increases: the component measuring subsidized units rose seven points to 46 and garden/low-rise units increased three points to 48. As for the other two, mid/high-rise units remained at 28 while built-for-sale units posted a three-point decline to 29.  However, all four MPI components were below the break-even point of 50 (Figure 1).

Multifamily Occupancy Index (MOI)

The MOI is a weighted average of the three built-for-rent market segments (garden/low-rise, mid/high-rise and subsidized).  The survey asks multifamily builders to rate the current conditions for occupancy of existing rental apartments, in markets where they are active, as “good”, “fair”, or “poor”.  Similar in nature to the MPI, the index and all its components are scaled so that a number above 50 indicates more respondents report that occupancy is good than report it as poor. 

All three components for the MOI experienced year-over-year declines.  The component measuring mid/high-rise units dropped eight points to 66, garden/low-rise units fell seven points to 77, and subsidized units decreased three points to 86.  Nevertheless, all three MOI components were above the break-even point of 50 (Figure 2).

The MMS was re-designed last year to produce results that are easier to interpret and consistent with the proven format of other NAHB industry sentiment surveys.  Until there is enough data to seasonally adjust the series, changes in the MMS indices should only be evaluated on a year-over-year basis.

Please visit NAHB’s MMS web page for the full report.

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Student Housing Construction Investment Rises in the Third Quarter of 2024

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Private fixed investment in student dormitories increased by 2.2% to a seasonally adjusted annual rate (SAAR) of $3.9 billion in the third quarter of 2024. This rise follows a 7% decrease in the prior quarter. However, private fixed investment in dorms was 1.8% lower than a year ago, as the elevated interest rates place a damper on student housing construction.  

Private fixed investment in student housing experienced a surge after the Great Recession, as college enrollment increased from 17.2 million in 2006 to 20.4 million in 2011. However, during the pandemic, private fixed investment in student housing declined drastically from $4.4 billion (SAAR) in the last quarter of 2019 to a lower annual pace of $3 billion in the second quarter of 2021, as COVID-19 interrupted normal on-campus learning. According to the National Student Clearinghouse Research Center, college enrollment fell by 3.6% in the fall of 2020 and by 3.1% in the fall of 2021.  

Since then, private fixed investment has rebounded, as college enrollments show a slow but stabilizing recovery from pandemic driven declines. Effective in-person learning requires college students to return to campuses, boosting the student housing sector. Furthermore, the demand for student housing is growing robustly, because total enrollment in postsecondary institutions is projected to increase 8% from 2020 to 2030, according to the National Center for Education Statistics. 

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Housing’s Share of GDP Falls in the Third Quarter of 2024

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Housing’s share of the economy fell 0.1 percentage points to 16.2% in the third quarter of 2024 according to the advance estimate of GDP produced by the Bureau of Economic Analysis. The share was revised upwards for both the first and second quarter of 2024 to 16.3%.

The more cyclical home building and remodeling component – residential fixed investment (RFI) – was 4.0% of GDP, slightly lower than the 4.1% in the second quarter. RFI subtracted 21 basis points from the headline GDP growth rate in the third quarter of 2024, the second consecutive quarter where RFI negatively contributed to GDP growth.

In the third quarter, housing services added 18 basis points (bps) to GDP growth while the share grew to 12.2% of GDP. Among household expenditures for services, housing services contributions were the third-highest contributor to headline GDP growth behind health care (30 bps) and food service and accommodations (19 bps), while above other services (12 bps) and transportation services (10 bps). The graph above stacks the nominal shares for housing services and RFI, resulting in housing’s total share of the economy.

Overall GDP increased at a 2.8% annual rate, down from a 3.0% increase in the second quarter of 2024, but up from a 1.6% increase in the first quarter of 2024.

Housing-related activities contribute to GDP in two basic ways:

The first is through residential fixed investment (RFI). RFI is effectively the measure of home building, multifamily development, and remodeling contributions to GDP. RFI consists of two specific types of investment, the first is residential structures. This investment includes construction of new single-family and multifamily structures, residential remodeling, production of manufactured homes, brokers’ fees and some types of equipment that are built into the structure. RFI’s second component, residential equipment, includes investment such as furniture or household appliances that are purchased by landlords for rental to tenants.

For the third quarter, RFI was 4.0% of the economy, recording a $1.175 trillion seasonally adjusted annual pace. RFI shrank 5.1% at an annual rate in the third quarter after falling 2.8% in the second. Among the two types of RFI, real investment in residential structures fell 5.3% while for residential equipment it rose 2.2%. Investment in residential structures stood at a seasonally adjusted annual pace of $1.153 trillion, making its share of residential investment far greater than that of residential equipment, which was at seasonally adjusted annual pace of $21.5 billion.

The second impact of housing on GDP is the measure of housing services. Similar as we saw with RFI, housing services consumption can be broken out into two components. The first component, housing, includes gross rents paid by renters, owners’ imputed rent (an estimate of how much it would cost to rent owner-occupied units), rental value of farm dwellings and group housing. The inclusion of owners’ imputed rent is necessary from a national income accounting approach, because without this measure, increases in homeownership would result in declines in GDP. The second component, household utilities, is composed of consumption expenditures on water supply, sanitation, electricity, and gas.

For the third quarter, housing services represented 12.2% of the economy or $3.581 trillion on a seasonally adjusted annual basis. Housing services grew 1.5% at an annual rate in the third quarter. Real personal consumption expenditures for housing grew 1.4% while household utilities expenditures grew 1.7%. At current dollar expenditure level, housing expenditures was $3.124 trillion and household utility expenditures stood at $456.6 billion in seasonally adjusted annual rates.

Housing service growth is much less volatile when compared to RFI due to the cyclical nature of RFI. Historically, RFI has averaged roughly 5% of GDP while housing services have averaged between 12% and 13%, for a combined 17% to 18% of GDP. These shares tend to vary over the business cycle. However, the housing share of GDP lagged during the post-Great Recession period due to underbuilding, particularly for the single-family sector.

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The U.S. Economy Posted Another Solid Growth in Third Quarter

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The U.S. economy grew at a solid pace in the third quarter of 2023, boosted by strong consumer spending and government spending. According to the “advance” estimate released by the Bureau of Economic Analysis (BEA), real gross domestic product (GDP) expanded at an annual rate of 2.8% in the third quarter of 2024, following a 3.0% gain in the second quarter of 2024. This quarter’s growth matched NAHB’s forecast.

Furthermore, the data from the GDP report suggests that inflation is cooling. The GDP price index rose 1.8% for the third quarter, down from a 2.5% increase in the second quarter of 2024. The Personal Consumption Expenditures Price (PCE) Index, which measures inflation (or deflation) across various consumer expenses and reflects changes in consumer behavior, rose 1.5% in the third quarter. This is down from a 2.5% increase in the second quarter of 2024.

This quarter’s increase in real GDP primarily reflected increases in consumer spending, exports, and federal government spending.

Consumer spending, the backbone of the U.S. economy, rose at an annual rate of 3.7% in the third quarter. It marks the highest annual growth rate since the first quarter of 2023. The increase in consumer spending reflected increases in both goods and services. While goods spending increased at a 6.0% annual rate, expenditures for services increased 2.6% at an annual rate.

The U.S. trade deficit increased in the third quarter, as imports increased more than exports. A wider trade deficit shaved 0.56 percentage points off GDP. Imports, which are a subtraction in the calculation of GDP, increased 11.2%, while exports rose 8.9%.

In the third quarter, federal government spending increased 9.7%, led by a 14.9% surge in national defense outlays.

Nonresidential fixed investment increased 3.3% in the third quarter. Increases in equipment and intellectual property products were partly offset by a decrease in structures. Meanwhile, residential fixed investment decreased 5.1% in the third quarter and dragged down the contribution to real GDP by 0.21 percentage points. Within residential fixed investment, single-family structures declined 16.1% at an annual rate, multifamily structures decreased 8.7%, while improvements rose 13.9%.

For the common BEA terms and definitions, please access bea.gov/Help/Glossary.

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All-Cash Sales and Prices Decline in the Third Quarter

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 All-cash purchases accounted for 7.9% of new home sales in the third quarter of 2024, marking the highest level this year but lowest level for the third quarter since 2022, according to NAHB analysis of the latest Census Quarterly Sales by Price and Financing report. Among mortgaged home sales, FHA-backed and VA-backed sales fell while conventional sales increased. This is in line with the overall trend observed in mortgage activity, as mortgage demand grew with moderating rates during this period. Despite the decline in total sales, the median purchase price of new homes (across all financing types) continued to increase in the third quarter.

Since the Federal Reserve began raising interest rates in early 2022, the share of all-cash new home sales has increased significantly, with an average of 8.7% amid this tightening cycle. The interest rate hikes have caused the average mortgage rate to more than double, surging from 3.1% in the fourth quarter of 2021 to 7.0% by the end of second quarter of 2024. The chart below illustrates how much more sensitive the all-cash share has become to changes in the federal funds rate since 2017. However, after peaking at 10.7% in the fourth quarter of 2022, the all-cash share has recently trended lower.

Although cash sales make up a relatively small portion of new home sales, they constitute a larger share of existing home sales. This share also increased significantly since the Fed began raising interest rates in early 2022. According to estimates from the National Association of Realtors, 30% of existing home transactions were all-cash sales in September 2024, up from 26% in August and 29% a year ago.

The share of FHA-backed sales fell from 13.0% to 11.9% in the third quarter of 2024, reaching the lowest level since the fourth quarter of 2022. This share remains below the post-Great Recession average of 17.0%. Meanwhile, the share of VA-backed sales also decreased, falling from 5.4% to 5.1%. Among declines in other types of new home financing, the share of conventional loans financed sales saw an increase in the third quarter of 2024, climbing from 73.9% to 75.1%, the highest level since the fourth quarter of 2022.

Price by Type of Financing

Different sources of financing also serve distinct market segments, which is revealed in part by the median new home price associated with each. In the third quarter, the national median sales price of a new home was $420,400. Split by types of financing, the median prices of new homes financed with conventional loans, FHA loans, VA loans, and cash were $466,100, $352,100, $404,000, and $401,600, respectively.

The purchase price of new homes financed with conventional and cash declined over the past year, while the price of homes financed with FHA loans and VA loans increased. The largest decline occurred in cash sales prices, which fell 21.1% over the year. This is in stark contrast to year-over-year price changes in the third quarter of 2022 and 2023, when median sales price rose 16.9% and 18.2% (see below).

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Remodeling Market Sentiment Dips in Third Quarter

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The NAHB/Westlake Royal Remodeling Market Index (RMI) for the third quarter of 2024 posted a reading of 63, down two points compared to the previous quarter.

Remodelers remain optimistic about the market even though the overall RMI edged down for the third consecutive quarter. Some have potential customers citing the upcoming election as a reason for putting large projects on hold. Remodelers also continue to face various headwinds such as difficulty finding skilled construction labor and higher interest rates. Nevertheless, the overall RMI reading of 63 is consistent with NAHB’s forecast for steady 2% growth in remodeling spending over the next two years.

The RMI is based on a survey that asks remodelers to rate various aspects of the residential remodeling market “good”, “fair” or “poor.”  Responses from each question are converted to an index that lies on a scale from 0 to 100. An index number above 50 indicates a higher proportion of respondents view conditions as good rather than poor.

Current Conditions

The Remodeling Market Index (RMI) is an average of two major component indices: the Current Conditions Index and the Future Indicators Index. 

The Current Conditions Index is an average of three subcomponents: the current market for large remodeling projects ($50,000 or more), moderately sized projects ($20,000 to $49,999), and small projects (under $20,000). In the third quarter of 2024, the Current Conditions Index averaged 72, declining one point from the previous quarter.  All three components remained well above 50 in positive territory: the component measuring small-sized remodeling projects (under $20,000) rose two points to 77, while both the component measuring moderate remodeling projects (at least $20,000 but less than $50,000) and the component measuring large remodeling projects ($50,000 or more) fell three points to 71 and 67, respectively.

Future Indicators

The Future Indicators Index is an average of two subcomponents: the current rate at which leads and inquiries are coming in and the current backlog of remodeling projects. 

In the third quarter of 2024, the Future Indicators Index was 55, down three points from the previous quarter.  Quarter-over-quarter, the component measuring the backlog of remodeling jobs fell three points to 57 and the component measuring the current rate at which leads and inquiries are coming in dropped two points to 53.

For the full set of RMI tables, including regional indices and a complete history for each RMI component, please visit NAHB’s RMI web page.

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2024 Second Quarter State-Level GDP Data

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Real gross domestic product (GDP) increased in 49 states and the District of Columbia in the second quarter of 2024 compared to the last quarter of 2023 according to the U.S. Bureau of Economic Analysis (BEA). Alaska reported an economic contraction during this time. The percent change in real GDP ranged from a 5.9 percent increase at an annual rate in Idaho to a 1.1 percent decline in Alaska.

Nationwide, growth in real GDP (measured on a seasonally adjusted annual rate basis) increased 3.0 percent in the second quarter of 2024, which is higher than the first quarter level of 1.6 percent. Nondurable-goods manufacturing; finance and insurance; and health care and social assistance were the leading contributors to the increase in real GDP across the country.

Regionally, real GDP growth increased in all eight regions between the first and the second quarter. The percent change in real GDP ranged from a 3.7 percent increase in the Rocky Mountain region (Colorado, Idaho, Montana, Utah, and Wyoming) to a 2.2 percent increase in the New England region (Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont).

At the state level, Idaho posted the highest GDP growth rate (5.9 percent) followed by Kansas (5.6 percent) and Nebraska (5.3 percent). On the other hand, Alaska posted an economic contraction in the second quarter of 2024. The agriculture, forestry, fishing, and hunting industry was the leading contributor to growth in 11 states including Idaho, Kansas, Nebraska, and the states with the highest increases in real GDP, respectively. Mining, which declined in 33 states, was the leading contributor to the decrease in real GDP in Alaska, the only state with a decline in real GDP.

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State and Local Tax Revenue – 2024 Second Quarter Analysis

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State & local tax revenue from property taxes paid reached $780.9 billion in the four quarters ending in the second quarter of 2024 (seasonally adjusted), according to the Census Bureau’s estimates. This is a 1.7% increase from the revised $767.7 billion in the four quarters ending in the first quarter of 2024. Year-to-date, total state and local tax revenue was $1.05 trillion. This was 5% higher than the $995.7 billion through the first two quarters of 2023.

The 1.7% increase in the four-quarter property tax revenue was down from the previous quarter of 1.8%. Property tax revenues have continued to grow above the average rate of 0.96% since 2011, with this quarter marking the seventh consecutive quarter of above average growth.

Year-over-year, property tax revenue was 9.1% higher. Year-over-year growth in property tax revenue has consistently been above 9% for four consecutive quarters. Dating back to 2012, the average year-over-year growth is 4.0%.

The property tax share of total state & local tax collections in the second quarter stood at 37.8%, down from 37.9%. This was the first decline in the share since its recent trough in the third quarter of 2022 (33.7%).

Of total collections, property tax made up the largest share, followed by sales tax at 28.0%. Individual income tax represented 25.5% of tax revenue, while corporate tax made up the remaining 8.7% of revenues for state & local revenues in the second quarter of 2024.

Over the past decade, state & local governments have been most reliant on property taxes for revenue. Sales tax has had an increased importance since 2023, when the share of sales tax of total revenues grew above individual income tax shares. See the chart below for the trends of total tax revenues shares.

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House Price Appreciation by State and Metro Area: Second Quarter 2024

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House price appreciation was recorded in all 50 states and the District of Columbia. Limited resale inventory and strong growth in demand continued to put upward pressure on house prices.

Nationally, house prices grew at a relatively slower pace, compared to double-digit annual growth during the COVID-19 pandemic. According to the quarterly all-transactions House Price Index (HPI) released by the Federal Housing Finance Agency (FHFA), U.S. house prices rose 5.9% in the second quarter of 2024, compared to the second quarter of 2023. This rate of price growth decreased from 6.4% in the first quarter of 2024.

The quarterly FHFA HPI not only reports house prices at the national level, but it also provides insights about house price fluctuations at the state and metro area levels. The FHFA HPI used in this article is the all-transactions index, measuring average price changes in repeat sales or refinancings on the same single-family properties.  

Between the second quarter of 2023 and the second quarter of 2024, all 50 states and the District of Columbia had positive house price appreciation, ranging from 1.5% to 10.4%. West Virginia led the way with the highest price appreciation (+10.4%). It was followed by New Jersey with a 10.1% gain, and New Hampshire with a 9.1% gain. Meanwhile, Louisiana had the lowest price growth (+1.5%). Among all 50 states and the District of Columbia, 28 states exceeded the national growth rate of 5.9%. Compared to the first quarter of 2024, thirty-five out of the 50 states had a deceleration in house price appreciation in the second quarter.

House prices have changed unevenly across U.S. metro areas, from the second quarter of 2023 to the second quarter of 2024. House price appreciation ranged from -4.6% to +20.7%. In the second quarter of 2024, 14 metro areas, in reddish color on the map above, had negative house price appreciation, while the remaining 370 metro areas experienced positive price appreciation.

Meanwhile, house prices in the second quarter of 2024 are much higher than they were before the pandemic. Nationally, house prices rose 49.7% between the first quarter of 2020 and the second quarter of 2024. More than half of the metro areas saw house prices rise by more than the national price growth rate of 49.7%. Among all the metro areas, house price appreciation ranged from 13.8% to 81.0%. House prices in the South and the West have grown faster than the prices in the Midwest and Northeast. Within the top 20 metro areas that had the highest house price appreciation, 11 metro areas are in the South Atlantic Division and six in the East South Central Division, while none were in the Midwest.

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Second Quarter Multifamily Missing Middle

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The missing middle construction sector includes development of medium-density housing, such as townhouses, duplexes and other small multifamily properties.

The multifamily segment of the missing middle (apartments in 2- to 4-unit properties) has disappointed since the Great Recession. For the second quarter of 2024, there were just 3,000 2- to 4-unit housing unit construction starts. This is flat from a year prior.

As a share of all multifamily production, 2- to 4-unit development was just above 3% of the total for the second quarter. In contrast, from 2000 to 2010, such home construction made up a little less than 11% of total multifamily construction. Construction of the missing middle has clearly lagged during the post-Great Recession period and will continue to do so without zoning reform focused on light-touch density.

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