While it's too early to celebrate, a leading economist recently predicted that the federal funds rate could drop to 3.25% after the Federal Reserve concludes its rate-cutting cycle. David Zervos, Chief Market Strategist at Jefferies LLC and head of Leucadia Asset Management's Global Macro Division, mentioned on CNBC following a Federal Reserve meeting in Jackson Hole that the Fed’s aim was to return to a “neutral” rate. He anticipated the rate would settle in the low-to-mid-3% range.
If that proves true, the construction industry could see significant growth.
Economists Differ on Vice President Harris’ Impact on Affordability Much of the discussion around housing initiatives has come from Vice President Kamala Harris, with ambitious plans for affordable homeownership. These include a $25,000 down payment assistance program for first-time buyers, which some economists warn could spur a buying surge, inflating home prices further. However, her $40 billion tax credit to make affordable housing projects viable for builders could counterbalance this by increasing supply in the long term.
Construction to Expand Over the Next Five Years Apartment construction is already accelerating in various regions, with 500,000 units expected in 2024 and over 2 million projected by 2028, according to RentCafe. Though this boom is currently concentrated in the Sunbelt and New York City, the overall market is expected to grow, with commercial construction contributing to an industry valued at $1.53 trillion by 2028, per ResearchAndMarkets.com.
Inventory Shortages Favor Major Builders Despite 1.5 million new housing units being completed in the year ending July 2024, the U.S. remains short of inventory, with only 3.8 months of supply instead of the healthy 6 months. This shortage has been exacerbated since the 2008 financial crisis and worsened during the pandemic. The majority of new construction has been driven by large builders who dominate the market in metro areas, controlling over 80% of the market in regions like Tampa.
The Challenge for Northern Cities Northern and coastal cities could benefit from a construction surge to reverse the migration trends caused by affordability issues. New York City has committed $26 billion to affordable housing initiatives over the next decade, aiming to deliver 500,000 new homes by 2032. In contrast, San Francisco, despite a smaller $70 million housing grant, continues to struggle with housing availability and homelessness, placing further pressure on its recovery.
Taxation and Remote Work Will Influence Migration Northern states may continue to experience population outflows if they cannot compete with the tax incentives and affordable housing of Sunbelt regions. Remote work, if it remains prevalent, may exacerbate this trend, but cities with higher-paying jobs, such as New York and San Francisco, could regain momentum through workforce-driven construction projects, including affordable housing.
First-Time Homebuyers to Drive Market Activity in 2025 Should Vice President Harris’ proposal for a $25,000 down payment assistance program come to fruition, first-time buyers will play a significant role in shaping the housing market across the country. This assistance could enable them to purchase homes up to $700,000, allowing for a strategy like house hacking, where new homeowners rent out additional units to cover mortgage costs.
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