Builder confidence falls amid market uncertainty
By Joe Higgins, Quest4Quality
The housing industry is a mess.
When the Federal Reserve began raising interest rates in March 2022 it swiftly impacted the economy, but no one got hurt more than homebuilders. Businesses suffered, but the dramatic rise in 30-year mortgages rates irretrievably broke the housing market.
The market was already struggling with the jump in home prices due to massive nationwide shortages in single-family homes. In some markets like Tampa, Fla., prices surged over three years by 50%. The rise in prices and rapidly increasing mortgage rates put home ownership out of reach for the average buyer.
This market change also impacted the home goods business, as fewer homes sold means fewer purchases of appliances, furniture and electronics.
Bedtime for Boomers
Things were already bad enough for our combined industries as existing homeowners took advantage of interest rates in the 2.4%-5% range, which we hadn’t seen in 30 years. These lucky refinancers decided to stay in their homes because interest rates have since jumped to over 7%.
See: The Higgins Report: Homeowners Staying Put
To make matters worse, homebuilder confidence has fallen to the lowest level since August 2024 amid concerns over tariffs, which are likely to continue driving up home costs.
The National Association of Home Builders (NAHB) reported that builder confidence fell to a 42 in February, which indicates a deep concern among homebuilders of all sizes about tariffs and deportations. A number over 50 means better conditions are expected for home buyers; anything below 50 predicts a decline in home sales.
The threat of significant deportations worries the building industry because it is estimated that nearly one-quarter of construction workers are undocumented and could be subject to arrest and expulsion. This would be more common in Sunbelt areas but will affect most builders, especially the larger companies.
Fewer workers mean longer construction times, delayed closings and higher costs. The housing industry is already somewhere between 3 million and 7 million houses short of the demand for completed and existing homes, which has driven up the price of housing.
Hi Neighbor
The second impact came with the announcement of 25% tariffs on Canada and Mexico. Builders asked for tariff exemptions but no action was taken. With much of the lumber for home construction coming from Canada, and other homebuilding products coming out of Mexico, prices could increase further.
According to Zillow, a new single-family home in America sells for more than $400,000 on average. If you add increases in lumber and labor, it could add upwards of $30,000 to the cost. We can all trust that U.S. homebuilders like D.R. Horton and Pulte Homes will pass those costs on to customers.
Another huge sticking point was the rise in mortgage rates right after the Fed cut interest rates on Sept. 18. As of mid-February, the rate on a 30-year mortgate was around 6.9%, according to Redfin, and is probably not going much lower. The experts think rates will hover between 6.3% and 6.9% throughout 2025 and into 2026.
Sales Incentives
So, what are builders doing to move a large inventory of completed homes? The NAHB report said 26% were lowering prices by 5%, and 60% offered incentives like wood floors, HVAC, upgraded countertops and interest rate buy-downs.
The spring selling season is about to start with all this as a backdrop. The uncertainty for builders is palpable, as the threat of higher prices, mortgage rates near 7% and now tariffs and deportations could tank the market.
In addition, the inventory of existing homes began to increase last month for the first time in three years. As Redfin noted, builders are now facing even more competition from these homeowners, as 20% who listed their homes have already cut their asking price.
Joe Higgins is a 44-year veteran of GE and Whirlpool Corp. who brings his executive experience to bear as a business consultant, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at Q4QwithJoe.com.
