While the U.S. housing market continues to show resilience, with new-home sales rising for the second consecutive year totaling 683,000—a 2.5% increase from 2023—homebuilders are assessing amid rising construction costs and tariff uncertainty. While tariffs on Mexico and Canada have been paused for one month as negotiations continue, the 10% tariff on China has already taken effect.
In a recent episode of National Association of Home Builders’ (NAHB) Housing Developments podcast, CEO Jim Tobin noted that “China, Canada, and Mexico are the top suppliers of building materials, and tariffs on these countries will directly impact construction costs and supply.”
Recent NAHB data shows that 7% of the $184 billion in materials used for residential construction in 2023 came from foreign sources, with Canada supplying 70% of imported wood products and Mexico providing 71% of lime and gypsum imports. With negotiations still ongoing, homebuilders are bracing for potential cost fluctuations in the months ahead.
December Surge in Homebuilding, But Annual Starts Still Trail
U.S. single-family homebuilding hit a 10-month high in December, with housing starts rising 3.3% and permits increasing 1.6%, signaling late-year momentum. However, tariff uncertainty and rising mortgage rates could limit a sustained recovery.
Multifamily construction also saw a December rebound, with starts for buildings with five or more units jumping to 418,000 units, though overall multifamily housing starts were down 25% year-over-year.
Despite the December surge, total housing starts fell 3.9% in 2024, while permits declined 2.6%, reflecting a market impacted by macroeconomic factors, supply chain disruptions, and still-high mortgage rates.
National Home Prices Hold Steady Despite Market Headwinds
Despite rising mortgage rates, home prices continued to climb in late 2024. The S&P CoreLogic Case-Shiller U.S. National Home Price Index reported a 3.8% annual increase in home prices for November 2024, up from 3.6% in October. The median resale home sold for $404,400 in both November and December, up 4.3% and 6% from the year prior, respectively, according to the National Association of Realtors. However, the price of a new construction home fell 2%, according to Census and HUD data, reflecting builders’ efforts to attract buyers in a higher-rate environment and respond to affordability challenges.
Homebuilder Sentiment Reflects Cautious Optimism Amid Still-Challenged Market
U.S. homebuilders remain cautious as tariff concerns, high mortgage rates, costly land, and tight financing conditions continue to challenge the market. In January 2025, the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) rose one point to 47, indicating a slight increase in builder confidence for newly built single-family homes.
NAHB Chairman Carl Harris noted that mortgage rates have climbed from 6.1% in late September to more than 6.9%, impacting near-term demand. However, he expressed optimism that policymakers may ease regulatory hurdles in 2025. NAHB expects a slight increase in single-family housing starts next year, though risks remain. “Builders report cancellations are climbing as a direct result of mortgage rates rising back up near 7%,” said NAHB Chief Economist Robert Dietz, highlighting the ongoing impact of borrowing costs on homebuyer activity.
Homebuilders Navigate Buyer Affordability Challenges
The nation’s largest homebuilders closed out 2024 with mixed results, reflecting persistent buyer affordability challenges pitted against resilient demand.
D.R. Horton, the largest U.S. homebuilder, posted strong Q1 fiscal 2025 earnings, with $7.6 billion in revenue. The company credited mortgage rate buydowns, their smaller home size offering, and other incentives for sustaining demand despite affordability pressures. Executive Chair David Auld noted that favorable demographics continue to support long-term housing demand.
Lennar, the second-largest homebuilder, missed Q4 earnings expectations, with new orders falling short—16,895 short of the 19,000 expected—and margins tightening to 22.1%. To address buyer affordability concerns, sales incentives increased to 10.8%, but buyer hesitancy amid volatile mortgage rates and tariff uncertainty weighed on performance, sending shares down 7.5% in aftermarket trading. CEO Stuart Miller noted a bright spot, highlighting that despite the shortfall, “we were able to maintain construction costs and reduce cycle time.”
KB Home reported $2 billion in Q4 revenue, fueled by a 17% increase in home deliveries, thanks to shorter build times. The company emphasized affordability as a key sales driver, with its Built to Order model giving buyers the flexibility to customize their homes while managing costs. CEO Jeffrey Mezger highlighted the impact of faster construction, stating, “At $2 billion, our total revenues were significantly higher year-over-year, driven primarily by a 17% increase in deliveries that resulted from substantially lower build times.”
Wildfires in Los Angeles to Perpetuate Housing Shortage
Los Angeles has long grappled with a significant housing shortage. Prior to the recent wildfires, the city needed to build 450,000 affordable housing units by 2029 to meet demand. The fires have exacerbated this crisis by destroying thousands of homes, displacing residents, and intensifying competition for the already limited housing supply.
According to a report by RedFin, single-family homes made up 89% of the total homes destroyed or damaged by the recent Los Angeles wildfires. Within the Palisades and Eaton fire perimeters, one in seven homes (14%) sustained damage or were completely lost. In total, 6,354 homes were affected, with 5,449 (86%) destroyed and 905 (14%) damaged.
With California already facing a well-documented construction labor shortage, homebuilders are also closely watching the potential impact of tariffs on material costs, which industry experts warn could add billions to construction expenses if fully implemented.
The expected sudden increase in demand from Californians displaced from the wildfire is expected to drive up rental prices, further straining affordability in a market where the median monthly rent is already 40% higher than the national median. The destruction of homes has created a ripple effect, with many displaced residents seeking temporary and long-term housing solutions in an area already struggling with limited availability. As the city embarks on rebuilding efforts, there is a pressing need to address these compounded challenges to ensure a more resilient and equitable housing landscape.
What’s Next for Homebuilders?
As 2025 begins, homebuilders are navigating a market shaped by buyer affordability pressures, construction costs rising from potential tariffs, and shifting economic conditions. While new-home sales ended 2024 on a high note, challenges remain—from rising mortgage rates and labor shortages to regional housing shortages exacerbated by natural disasters. Yet, builder incentives and lower build times offer reasons for cautious optimism. With homebuilders adapting strategies to meet affordability concerns, the industry is positioned for moderate but steady growth in the year ahead.
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