The article below was written by Dr. Robert Dietz, Chief Economist at the National Home Builders Association.
Despite tax policy wins for housing and the construction industry, the single-family housing market has disappointed thus far in 2025.
Single-family builder confidence, as measured by the NAHB/Wells Fargo Housing Market Index (HMI), retreated in August to a level of 32. Builder sentiment has been in negative territory (a sub-50 reading on the HMI) for 16 straight months and stuck in a low range of 32 to 34 since May. The HMI’s buyer traffic reading remains very low at a level of 22, as elevated interest rates and construction/price growth has priced out many prospective home buyers.
Challenging affordability conditions continue to weaken single-family home construction in 2025. Single-family starts increased 2.8% to a 939,000 seasonally adjusted annual rate, but are down 4.2% on a year-to-date basis. The slowdown in single-family home building has narrowed the home building pipeline. There are currently 621,000 single-family homes under construction, down 1% in July and 3.7% lower than a year ago. This is the lowest level since early 2021 as builders pull back on supply.
However, multifamily development is benefiting from the low levels of for-sale inventory. The multifamily sector, which includes apartment buildings and condos, increased 9.9% in July to an annualized 489,000 rate and is on pace to post a larger than 10% gain for starts in 2025. Indeed, the NAHB Multifamily Production Index remains near a neutral reading, coming in at a level of 46 for the second quarter.
While soft, the housing market is being supported by a relatively stable economy that registered a 3% GDP growth rate in the second quarter and an unemployment rate near 4%. However, ongoing tariff uncertainty and anemic job growth continue to act as headwinds to the economy and housing sector.
The CPI measure of inflation held steady at a 2.7% year-over-year growth rate in July. However, there were hints of tariff-induced inflation as the core goods inflation reading has now accelerated somewhat over the past three months. Residential construction building costs increased in July in the separate PPI data; however, this was not a tariff-related effect as the PPI data does not count tariff costs. Overall, such building materials were up 2.8% from a year ago.
The effects of tariffs on prices, while measurable, are smaller than those feared back in April (due to trade deals resulting in lower tariff rates). If such effects remain one-off changes and relatively minor, the remaining economic backdrop confirms that the Federal Reserve should proceed with additional rate cuts this fall.
NAHB is forecasting two rate cuts before the end of 2025. Doing so will provide support for those parts of the economy, particularly housing, that have been dealing with persistently elevated interest rates. Such monetary policy action will be particularly beneficial for land development and construction loan financing. This market remains tight, with interest rates averaging 8%. Declines for the Fed-controlled federal funds rate will have a direct one-for-one impact on such loans and enable more affordable development.
