The homebuilding sector is gearing up for the critical spring selling season, but persistent headwinds—from still-elevated mortgage rates to rising construction costs—are adding pressure. Builder confidence has plummeted to its lowest level in five months, with the National Association of Home Builders (NAHB) Housing Market Index falling five points in February to 42.
The weak sentiment extended to the equity market, where stock prices of all 18 companies in the S&P Composite 1500 Homebuilding Index declined last week, pushing the Index to its lowest level since December 2023. During the recent Toll Brothers earnings call, CEO Douglas Yearly said of the industry challenges, “Although demand has remained healthy in many of our markets and particularly at the higher end, affordability constraints and growing inventories in certain markets are pressuring sales—especially at the lower end.”
Elevated Mortgage Rates Are Pressuring Demand
Persistently high mortgage rates remain a major obstacle for the housing industry. Despite hopes that Federal Reserve rate cuts would bring relief, borrowing costs have stayed elevated, with the average 30-year fixed rate just under 7%, making homeownership less attainable for many buyers.
According to the National Association of Realtors (NAR), sales of previously owned homes fell 4.9% in January compared to the previous month. While inventory has increased by 17% year-over-year, the housing supply remains tight, contributing to rising prices. The median home price hit $396,900 in January—a record high for the month.
Higher rates have also dampened builder incentives. In February, only 26% of builders reported lowering prices, down from 30% in January and the lowest level since May 2024. The use of other sales incentives also declined. While many homebuilders have offered rate buydowns or price reductions to attract buyers, “incentives lose their power when affordability is simply out of reach,” said Manus Clancy, head of Data Strategy at LightBox. “With mortgage payments now consuming 38% of the average family’s income, demand is being pushed further out of reach for many would-be buyers,” Clancy noted. NAHB Chairman, Carl Harris, echoed this concern, noting that as interest rates remain elevated, fewer buyers can qualify for mortgages, weakening incentives as a sales strategy.
Construction Costs and Supply Chain Disruptions
Beyond financing concerns, homebuilders are grappling with rising material costs and supply chain disruptions. The latest NAHB survey showed a steep drop in sales expectations as cost concerns mounted. The administration’s 25% tariff on aluminum and steel—that takes effect March 12th—and the softwood lumber tariff—effective in early March— will likely drive-up construction expenses, while supply chain adjustments made to mitigate these costs will more than likely lead to project delays. While tariffs on North American imports were paused for 30 days, extending the deadline to March 4, 2025, uncertainty over future trade policies is making builders more cautious about new projects.
Softwood lumber and gypsum—two critical materials in new home construction—are primarily imported from Canada and Mexico, respectively. According to the NAHB, in 2023, the U.S. imported $8.5 billion worth of sawmill and wood products, with nearly 70% coming from Canada. Many of these imports are already subject to a 14.5% antidumping and countervailing duty tariff, with total imports from Canada amounting to $5.8 billion.
The U.S. also imported $456 million worth of lime and gypsum products in 2023, with 71% originating from Mexico, totaling $352 million in imports. Beyond lumber and gypsum, various raw materials and components—such as steel, aluminum, and home appliances—are sourced from China and remain subject to existing tariffs.
Proposed new tariffs on imports from China, Canada, and Mexico are expected to increase the cost of imported construction materials by $3 billion to $4 billion, depending on specific rates. For materials where imports are a critical part of supply, these tariffs could lead to significant price spikes, adding further cost pressures that may hinder homebuilders’ ability to deliver new projects.
The NAHB has called for tariff exemptions, warning that additional costs will only deepen the housing affordability crisis. In a letter to the president, the NAHB stated, “serious concerns that proposed 25% tariffs on Canada and Mexico will have the opposite effect, by slowing down the domestic residential construction industry.”
Construction Starts Drop as Market Pressures Weigh on Homebuilders
Single-family and multifamily construction activity slowed in January, reflecting ongoing affordability challenges and elevated costs. According to the U.S. Department of Housing and Urban Development and the Census Bureau, total housing starts fell 9.8% to an annualized rate of 1.37 million units. The decline was driven primarily by a 4.7% drop in single-family starts, as high mortgage rates continued to limit affordability and dampen demand. Meanwhile, multifamily starts declined more sharply, falling 24.2% to 357,000 units, signaling caution among developers in the rental market.
Despite the slowdown in starts, overall housing permits edged up 0.1% to a seasonally adjusted 1.48 million units, with multifamily permits rising 0.2% and single-family permits holding steady, reflecting continued caution among builders. NAHB Chief Economist Robert Dietz emphasized that cutting inefficient regulatory costs could help improve housing supply and ease affordability pressures, but policy uncertainty and potential tariffs continue to weigh on builder sentiment.
How Homebuilders Are Adapting to Market Challenges
In response to rising material costs and supply chain disruptions, homebuilders are actively implementing strategies to mitigate these challenges. Many are expanding their supplier networks both domestically and internationally to reduce reliance on single sources, enhancing resilience against trade disruptions and material shortages. Securing long-term contracts and bulk purchasing agreements has become a common practice to stabilize pricing and ensure a steady supply of materials, effectively managing costs and maintaining project timelines despite market volatility. Additionally, exploring alternative materials can help to lessen the impact of tariffs on traditional building supplies, offering cost-effective solutions without compromising quality.
Toll Brothers is transitioning toward a more flexible, capital-efficient land strategy by prioritizing land options over outright ownership, according to their Q4 2024 earnings call. At the end of fiscal year 2024, the company controlled approximately 70,400 lots, with 49% secured through options. This approach reduces upfront costs, lowers risk, and maximizes returns while maintaining a strong land pipeline for future development.
Homebuilders Face a Challenging Spring Market Expecting Mixed Results
The decline in builder sentiment ahead of the critical spring homebuying season signals potential slowdowns in both new construction and sales. For Toll Brothers, whose demand for homes continued to be supported by their affluent customer base and approximately 26% of buyers paid cash, an elevated interest rate could be less of an issue. But for other builders who focus on affordability, financing incentives and rate buydowns will be levers to help maintain sales pace, which of course can hurt homebuilder profitability.
Analysts note that in this environment, homebuilders have limited pricing power and are dealing with rising land costs as well as other cost uncertainties like tariffs on materials, construction labor, and borrowing costs, which will put continued downward pressure on margins in upcoming quarters. Other builders are exploring cost-reduction measures and advocating for regulatory reforms that could provide relief. Without improvements in affordability and financing conditions, homebuilders may continue to face headwinds in the months ahead.
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