Twists & Turn

NAHB Chief Economist offers a realistic economic outlook.

Last month the Iowa City Home Builders Association hosted its annual economic outlook member dinner. Speaker National Association of Home Builders Chief Economist Robert Dietz offered a realistic glimpse of the economic road ahead that warns of some possible twists while hinting at mostly positive turns.

Possible Twists

Deitz says economists see many encouraging signs that the country is on the path to normalcy since the COVID rollercoaster, but there are caution signs as well. “Personal savings is at 2.9%,” he says, “and when the savings rate goes down, the economy slows.”

Although the slowdown hasn’t begun in earnest, Dietz expects that to take place if other changes don’t occur first. “The labor market is also a good indicator, and we’re seeing a gradual rise in unemployment. The open-job rate has been declining over the past two years since the Fed started raising interest rates, and it’s still declining.”

Wage growth, another aspect of the labor market, also warns of bumps ahead. “Wages tend to go up when productivity goes up. But right now wages are growing faster than productivity. This is the economist’s definition of inflation,” says Dietz. “If those two factors converge, it’s a green light for the economy. But we’re not there yet.”

He says, “The last leg of the inflation journey is all about the housing sector. And shelter inflation is still growing, which is keeping overall inflation on the rise.”

Home prices across Iowa have increased nearly 40% since COVID due to a variety of factors. Although some communities are seeing record growth, which is driving prices, housing costs are also up due to supply issues and regulatory costs.

“U.S. builders get about one-third of their lumber from Canada. Unfortunately, the Commerce Department just approved an increase in tariffs on lumber that will go into effect later this year,” warns Dietz. “Unless domestic lumber mills increase production to offset that, you can expect lumber prices to go up after the first of the year.”

On top of that, the costs that a builder or developer incurs simply doing business are rising so quickly that entry-level buyers are nearly priced out of the market. “The cost of construction and development loans has been in the 13% to 15% range for a while, which slowed development. The cost per square foot for any new construction makes it difficult to build entry- level homes. And regulatory costs now make up 24% of the cost of building a new home,” Dietz says. “When you aren’t able to build affordable housing, you hurt young buyers. Hopefully that’s a message that will resonate during this election season.”

Positive Turns

Despite those twists in the road, Dietz sees positive signs as well.

“We’ve seen all positive quarters for the GDP over the last year, and inflation is down without generating a recession,” he says. “Economists don’t see an official recession in the forecast, so that’s a good sign.”

The Fed cut interest rates in September and is expected by all accounts to do so again before the end of the year. Additional cuts are anticipated over the next 18 months. “If that happens, long-term rates will drop and mortgage rates will move lower during that period, most likely during the second half of 2025,” says Dietz. “We expect to see mortgage rates drop to 6% or just under, which will improve housing demand.”

Dietz says the economic focus has been on the Fed and its activities during the past several years, but he foresees the national deficit as a larger factor. “Fiscal policy and the deficit are going to have be a focus, especially in an election year. That has a direct effect on mortgage rates.”

Another hot political topic that has actually been a source of economic strength is immigration. “Over the last three years, there’s been a jump in immigration, both documented and undocumented. And more people in the country means more spending, so that has helped keep the economy moving,” he says.

For the housing and construction market, positive signs include commercial construction, especially in the Midwest, which is seeing strong commercial and manufacturing growth; custom-home construction; and corporate migration.

“As the tech industry continues its rapid growth, those companies are looking for sites for their facilities,” says Dietz. “They tend to look in regions that have cooler climates, that have affordable living options, and that have business-friendly regulation. Iowa is one of those places.”

In fact, Iowa is one of several states that have recovered 100% of jobs lost during COVID. “The only states that have surpassed those numbers are Idaho and Utah, which didn’t shut down during COVID and have had strong pro-business regulatory policies historically,” he says.

Any sensible economist will tell you that making economic predictions is more of a gamble than predicting the weather. In fact, when Dietz makes his presentations, he includes what he refers to as “game time” during which he looks back at his predictions for the current economy to see how close he came to the mark. “Sometimes my predictions are a little too optimistic. Some are a bit too pessimistic,” he says. “But I can confidently say there are lower rates on the road ahead.”

And that’s a pretty good sign.