Real Estate - Residential

Economists Forecast Interest Rate Drop, Uptick In Residential Starts

By Emma Dill, posted Mar 28, 2024
An audience member asks regional economist Mouhcine Guettabi a question during a housing forecast event hosted by Cape Fear Realtors and the Wilmington-Cape Fear Home Builders Association. (Photo by Emma Dill)
A panel of economists presented a cautiously optimistic forecast for the housing market on Thursday during an event hosted by Cape Fear Realtors and the Wilmington-Cape Fear Home Builders Association.

On a national level, the economists said they expect to see continued demand for housing along with interest rate cuts from the Federal Reserve later this year. Locally, the population growth that’s helped fuel the housing market in the Cape Fear region is expected to continue but at a slower rate. 

“The forecast I gave you last year was fairly pessimistic," Robert Dietz, the senior vice president and chief economist with the National Association of Home Builders, said Thursday. "We were expecting an additional year of decline in housing activity because of elevated rates. We thought the fight against inflation was going to take some time."

“The forecast this year is decidedly more positive. Now, that's not to say that the good things are coming to us really quickly, I think we're going to have to be patient.”

The National Association of Home Builders is forecasting that the U.S. Federal Reserve will issue two rate cuts this year in the fall and winter, Dietz said. Since March 2022, the Federal Reserve has issued 11 interest rate increases in its attempt to tamp down nationwide inflation. 

Those interest rate hikes have led to increased costs for homebuyers and prompted those who bought homes when interest rates were lower to stay put until rates drop, said Jessica Lautz, the deputy chief economist and vice president of research for the National Association of Realtors.

“When we reflect back on the market in 2023, it really was the worst home sales activity that we've seen since 1995,” she said. “And when we look at that, what we can see is that while there's been a huge population growth, the inventory of homes has not met the demand that we currently have right now.”

Rate hikes have also created substantial cost increases for commercial developers, including those building apartments and other multifamily units, Dietz said. Still, the organization is forecasting an increase of 4.7% in single-family starts this year with 988,000 new units.

“Higher interest rates for builder and developer loans means the lot development pipeline is going to be constrained, that's typically a two to three-year window, and so we do expect lot shortages and higher prices, as we move into the second half of this year and going forward into 2025,” he said.

The National Association of Home Builders forecasts a “bumpy ride” for mortgage rates but expects them to trend down by late 2025. The group is forecasting a 23% decline in multifamily construction this year – a “cooling off period” that follows the apartment boom that took place after the COVID-19 pandemic, Dietz said.

However, demand for housing has stayed strong in the Cape Fear region. Over the last decade, the population in the Wilmington area increased approximately 16% – a higher rate than the 10% growth rate statewide and the 6% growth rate across the U.S., Dietz said.

Between 2020 and 2023, the South added 4 million people with about 2.5 million coming through domestic migration. Domestic migration peaked in 2020 as remote workers and those who opted for early retirement flocked to the area, said Mouhcine Guettabi, Wilmington's regional economist and an associate professor of economics at the University of North Carolina Wilmington.

The area's population is still growing, but the uptick has slowed, forcing a post-COVID “recalibration of expectations,” he said. During the pandemic and post-pandemic period, the Wilmington area saw an increase in millennials. 

“Young people in particular are voting with their feet and with their pocketbooks and then picking high amenity, high quality of life, reasonably low cost of living areas, and it seems as though at least during the pandemic, we were winners when it comes to this,” Guettabi said.

“The fundamental question from a policy perspective, from a growth perspective, is how do we stay on that trajectory?” he added. “And how you stay on that trajectory is going to require investments in infrastructure and quality of life, and in maintaining the things that people voted with their feet to come and get. And so that's where the challenge rests.”

The area also has witnessed an uptick in job growth with approximately 9% more jobs than in February 2020, Dietz said.

“The local labor market is really strong, and that’s great for housing demand,” he said.

The National Association of Realtors is broadly seeing an uptick in the income of a typical homebuyer with 35 being the median homebuying age. Each home listing typically receives 2.7 offers, Lautz said, and Baby Boomers and single homebuyers are playing an increasingly active role in the real estate market.

Guettabi said the interest rates that have impacted both residential and commercial real estate in recent years are expected to decline, but it could be a gradual shift. 

“I think we're going to start slowing down a little bit,” Guettabi said. “But it's not a doom and gloom. I think interest rates are going to come down, but I don't think you should bet the farm that they're going to come down by 50% over the next six months.”
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