In a recent CNBC interview, I said that President Trump wants lower mortgage rates to help the housing market deal with tariff impacts — especially the homebuilders. Trump believes that lowering mortgage rates will boost mortgage demand and counteract higher costs on building materials. During the COVID-19 pandemic, lumber prices were nearly $1,000 higher than they are today, yet lower interest rates allowed builders to sell those homes.
Today’s homebuilder survey is only 4 points away from the lows we saw in the COVID-19 recession, which means homebuilders aren’t optimistic about their ability to build and sell homes in these economic conditions.
At the end of 2024, I identified the new home sales sector as the wild card for an economic recession, as supply and margin pressures were mounting. Then, the Godzilla tariffs took center stage, causing people to overlook the homebuilders. The results of the homebuilder survey released today were simply dismal. This does not bode well for future home production and it also serves as a key recessionary indicator that I have been monitoring.
Traditionally, residential construction workers lose their jobs before a recession hits, and the most recent report showed a slight decline in labor data.
What homebuilders are concerned about
Here’s the fascinating portion of today’s NAHB builder survey:
“Policy uncertainty stemming in large part from the stop-and-start tariff issues has hurt builder confidence but the initial trade arrangements with the United Kingdom and China are a welcome development,” said NAHB Chief Economist Robert Dietz. “Still, the overall actions on tariffs in recent weeks have had a negative impact on builders, as 78% reported difficulties pricing their homes recently due to uncertainty around material prices.”
When companies are uncertain about government policies, it creates confusion surrounding their business models. Fortunately, we are beginning to see some de-escalation in trade wars, which will provide builders with more clarity moving forward. As we can see in the chart below, the monthly supply for the builders is still elevated and their inventory is picking up. They sell homes as a commodity, so profit margins matter because they’re not the March of Dimes.
However, another significant concern remains: mortgage rates are currently near 7%. Builders tend to perform better when mortgage rates are around 6% rather than near 7%, which is where we are today. Additionally, the supply of completed units has risen to traditional peak levels, so I would expect housing starts and permits to start to fall. This context helps explain the declining confidence among builders in all four categories.
Conclusion
While the existing home sales purchase application data has shown 15 straight weeks of positive year-over-year growth — in fact, double digits in the last two weeks — the existing home sales are working from all-time lows. In contrast, new home sales are still at 2019 levels, hence why the builders’ confidence is fading because they have a higher bar of sales to maintain.
Housing start data will be released tomorrow and the focus should be on housing permits. Mortgage rates have recently dipped and there is some clarity suggesting that the most challenging aspects of the trade war may be behind us and could improve further. While this survey is somewhat outdated, the housing sector would benefit significantly if mortgage rates were closer to 6% rather than 7%.
First Time Home Buyer FAQs - Via HousingWire.com
