Economic uncertainty and tariff negotiations have left home builders that lenders increasingly partner with feeling blue.
Builder confidence in June sank to a low akin to the onset of the coronavirus pandemic, according to the sector's latest monthly index. The homebuilding industry is dealing with the high mortgage rates suppressing stronger housing demand, and unique challenges in labor shortages and trade negotiations heating up costs.
Robert Dietz, senior vice president and chief economist at the National Association of Home Builders.
Herman Farrer/Herman Farrer Photography
The nation's housing market is still short around 1.5 million homes, an ultimate tailwind for home builders, said Robert Dietz, the National Association of Home Builders' senior vice president and chief economist. Anticipated short-term interest rate cuts from the Federal Reserve that could have an influence on long-term mortgage borrowing costs, and tariff certainty may stabilize homebuilder economics, while certain aspects of President Trump's Big Beautiful Bill could offer greater economic momentum.
The expansion of a low-income housing credit and extension of the lower tax rates in the bill may benefit homeowners in addition to builders and remodelers that are small businesses, according to Dietz.
"There's just a lot to cheer for that will help the housing market," Dietz said of the bill.
That statement comes with a caveat, however, as the bill which had yet to pass at the time of Dietz's interview does do things like eliminate some tax credits for green construction. National Mortgage News spoke with Dietz about the homebuilder outlook on tariffs, the immigration enforcement impact on labor, and construction industry economics at large.
This interview has been edited for length and clarity.
Tariffs impacts on builders
Dietz: The uncertainty has a cost effect. Economic momentum at the start of the year kind of stalled out, which unfortunately probably leaves the single-family home construction market in a position where it will post a negative growth rate for 2025, which seems like kind of a missed opportunity. But there's a lot of stops and starts as policies are re-evaluated.
There's a 14.5% duty rate that comes from a countervailing and anti-dumping duties process, which is separate from the tariff debate taking place. That 14.5% rate is likely to go up to about 30% by the end of the summer. And then, will there be a 25% tariff on all Canadian products that would stack on that?
There's a separate 232 process where certain commodities like steel and lumber are being evaluated on whether we should be manufacturing more of them in the United States for national security purposes, so that could be another tariff. The risk is that by the end of the year, you could potentially have a number of different duty and tariff policies that all stack.
What builders are rooting for is utilizing the leverage that's come from this aggressive tariff policy to generate better trade deals and macro certainty. In the next week or so, we're going to see another rush against the self-imposed reciprocal trade deadline of July 9. We've asked builders to the extent that you've gotten cost increases from suppliers of your building materials, and in our last measure the impact was about $11,000 per single family home. That was concentrated among 60% of builders who reported such a cost effect.
That means 40% were saying it had no effect so far. But the compelling number in our last (monthly builder) survey was that three quarters of builders reported that they were having some difficulty pricing the homes that they sell because of general policy uncertainty.
How labor could be affected by immigration enforcement
Dietz: We know that these immigration enforcement efforts are scaling up, so there's growing discussion of what the impacts are going to be. I think we're going to see more reporting of labor being tight because of the immigration angle.
To be clear, the skilled labor shortage has been a thing for a while. It is due to factors beyond immigration. It has a lot to do with the fact that a lot more kids coming out of high school go to college, and they're not going into vocational schools, and they're not joining construction companies.
Builders reported that the lack of availability of contractors and subcontracting firms meant construction times were extended. We took the data from that study and published some supplemental numbers. What we found was that the skilled labor shortage likely results in a reduction in homebuilding activity each year of about 19,000 homes, and it represents roughly an $11 billion a year challenge. So you kind of think of that as like the baseline, immigration enforcement heightens that.
On the other hand, the demand for labor has softened when you look at what is otherwise a softening home building environment. Single family permits are down more than 5% on a year-to-date basis. So you've got a growing challenge on the labor side, mixed against the existing labor challenge, but then also some weakening demand for builders, and there's some offsetting forces there. If you think about the big picture, it's a reminder that the industry needs to continue to recruit and educate people and bring them into the sector.
On 37% of builders reporting cutting prices in June and how long it can last
Dietz:That does represent profit margin compression. It has an impact on the availability of capital that you can get.
We do think that most markets in the country are going to see some price softness over the coming year. We've already seen in the overall data markets like Austin, Texas, for example, that have seen price declines from the peak. And what's happening is that resale inventory growing, the number of buyers out there is shrinking, and existing home sellers are going to have to undertake the price discovery process that builders had to do back in late 2022 and 2023, so this connects what we were talking about: amenity upgrades, mortgage rate buydowns, price cuts.
In any given month, more than two-thirds of builders are using these kinds of incentives to move inventory. Existing homeowners, on the other hand, are mostly seeing prices growing and growing and growing because of the structural housing deficit. Given that mortgage rates remain closer to 7%, a lot of existing home sellers now are going to have to test the market and, frankly, test what they think their home is worth, which can often mean in some markets, some price cuts.
Other headwinds, or tailwinds, for builders
Dietz: Uncertainty remains the big headwind. I do hope that we will see some calming of those policy waters. There's been some bright spots. Single family build-for-rent construction continues to do well, it's about 10% of single family building. That's a reflection of the fact that you've got a weakening of home buying conditions. So builders are switching over and doing a little bit more rental-type development.
There's still a mismatch between the number of units in the housing stock that are available to be rented or to be purchased, and the size of the population for that structural deficit. We've been fairly aggressive and insistent on the idea that the deficit is really closer to 1 million or 1.5 million homes. We have tended to view with some skepticism the idea that there are 4 million or more in terms of the deficit, those numbers strike us as too large.
But the fact that the deficit continues to exist is a tailwind. If we can navigate some of these policy issues, see an improvement in affordability, see actions like regulatory reform to help reduce cost construction, and the benefits from the tax policy, that will cause the housing market to expand in the years ahead.
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