The article below was written by Dr. Robert Dietz, Chief Economist at the National Home Builders Association.
The word thus far for the 2025 housing market is "disappointing." NAHB started the year expecting relatively flat conditions due to anticipated policy change that would implement much-needed tax policy certainty and regulatory reform. Instead, persistently elevated interest rates, ongoing challenges for housing affordability and weakening consumer confidence have moved many buyers to the sidelines. This reduction for housing demand comes as existing home inventory is rising, leading to a reduction in construction activity and growing reporting of home price cuts.
For example, the NAHB/Wells Fargo Housing Market Index (HMI) measure of home builder confidence came in at a level of 33 in July. While one point higher than June, the July reading marks the 15th straight report in negative territory. The traffic component of the HMI was 20 in July, the lowest reading since the end of 2022. Marking a record since NAHB began collecting this data in the post-Covid period, the number of builders implementing price cuts increased to 38% in the most recent HMI.
Consistent with these weak readings of builder sentiment, single-family housing starts declined 4.6% in June, dropping to an 883,000 seasonally adjusted annual rate. For the first half of 2025, single-family starts are down almost 7% compared to the first half of 2024. Weakness was seen in most regions, especially in the South where single-family construction is down 12% on a year-to-date basis. Countering this trend, single-family home building is up 10% for the first half of 2025 in the relatively housing affordability-advantaged Midwest.
The 2025 challenges for the for-sale housing market have boosted the outlook for the apartment development sector. Multifamily 5+ unit construction was up 30% in June, with this sector of the construction industry up more than 15% for the first half of 2025. With fewer home owners moving, the remodeling market continues with solid conditions. The NAHB/Westlake Royal Remodeling Market Index (RMI) came in at a positive level of 59 for the second quarter of the year, down year over year, but continuing a five-year trend of positive market readings.
Macroeconomic conditions continue a mixed trend as the summer progresses. Inflation picked up in June, with the CPI increasing to 2.7% -- a four-month high. Shelter inflation continued to decline, falling to a still elevated rate of 3.8%. Given that shelter inflation has been the leading source of inflation for more than two years, this data is a signal for the Federal Reserve to continue cutting the federal funds interest rate at its coming policy meetings. However, some evidence of tariff effects are appearing in the inflation, including gains for toys, apparel and some home furnishing goods.
While the recently enacted One Big Beautiful Bill Act provides some policy certainty and pro-growth tax cuts, uncertainty remains the challenge for macro conditions in 2025. The ongoing drama around tariffs is concerning for employers and employees in sectors reliant on imports and border states with regional economies dependent on trade. And the rising government debt levels, combined with uncertainty in international capital markets including issues regarding international buyer demand for U.S. Treasuries, have placed upward pressure on long-term interest rates. With mortgage rates stuck in a range near 7%, this remains the most pressing challenge for the housing market as we enter the second half of 2025.
