Throughout the first half of 2025, the housing market did not see the anticipated spring selling season, not due to lack of housing demand, but because of affordability problems and persistent, high mortgage interest rates. Many economists were concerned that the housing industry was experiencing a recession because of the lack of activity. The market faces uncertainty from the potential return of higher inflation driven by tariffs, as well as from labor shortages in construction tied to the crackdown on illegal immigration.
With the underperformance of the first half of the year, 2025 will end up being another weak year for housing. Home builders have been buying their market with flexible incentives of up to 5% of sales price and interest buydown programs. These programs appear to be waning. Many builders are reverting to straight sales price reductions to liquidate their bloated standing inventory or to improve their unit sales count over margin to keep their employees and crews busy. For most builders, because of the long lead times of the to-be-built homes, home closings for 2025 have concluded (except for completed or under construction inventory homes).
Looking forward, 2026 should be a banner year for housing. Housing demand is strong. The two largest populations, millennials and Gen Zers, will be either at their prime home buying age or just entering the market. The inflationary threat from the tariffs will be behind us, mortgage interest rates will be down to acceptable rates, and the current surplus of new home inventory will have been sold.
Employment
After the FOMC met last week and held the federal reserve rate constant for the fifth consecutive meeting, the July jobs report showed a jaw-dropping 29.8% shortfall (at 73,000 net new jobs, from the expected 104,000) and a mammoth downward aggregate adjustment in job growth for May and June of 258,000 jobs. The three-month average for payroll growth declined from 150,000 to only 35,000. The labor participation rate declined for the third straight month, and unemployment rose to 4.2%. Labor costs were in line with the Fed’s inflation goal, so labor does not appear to be contributing to inflationary pressures.
Economic Growth
The GDP contracted during the first quarter of this year by 0.5%, but rebounded in the second quarter to 3.0%. This was due to an increase in imports during the first quarter in anticipation of the tariffs and a contraction of exports. In addition, there was an increase in consumer spending in anticipation of a tariff cost pass-through during the second quarter. With the softening economy, households are currently cutting back on discretionary spending. However, growth of the economy should accelerate in 2026 when the impact of the One Big Beautiful Bill begins to take effect along with the Fed’s easing of monetary policy, dropping the Fed funds rate by an anticipated 100 bps before the beginning of 2026.
Inflation
Inflation is basically in check at this point and close to the Fed target rate of 2.0%. The lack of action by the Fed has been the anticipation of the inflationary impact of the tariffs. So far, there has been little to no impact. The general economy is slowing in both the manufacturing and service sectors. The forecasts have been for the core CPI and PCE deflator to be about 3.0% in the fourth quarter as the tariff cost pass-through on goods and services and pre-tariff inventories are depleted.
The July labor report should have been a wakeup call for the Fed to begin to aggressively move interest rates to be less restrictive. It has held the 4.25%‒4.50% target for the last five meetings with a wait-and-see attitude. It is going to act with too little, too late again, just as it did with inflation when it was referred to as transitory.
Federal Reserve
The Fed was too late and too timid in fighting inflation when it was referring to it as transitory. Rates began increasing in March of 2022 with a total of 11 rate increases through July 2023. The target range for the Fed funds was increased to 5.25%‒5.50%. In September 2024, probably too early, it reduced the target rate by 50 bps and another 25 bps in both November and December, for a total of 100 bps reduction.
This action sent a message to the home building community to anticipate a strong spring housing market. Builders began to build up their inventories to be prepared for the spring selling season which did not materialize.
Mortgage interest rates tumbled in September 2024 to just above 6.0%. The homebuyer was back in the market. However, mortgage rates quickly increased again to 7.0% by the end of the year, cutting off the homebuyer.
Mortgage rates have fluctuated between 6.5% and 7.0% so far this year. The Fed should have cut the target rate range by at least 25 bps at its July meeting. A 50 bps reduction would have been preferred to stimulate housing and the economy.
Currently, it is forecast that the Fed will cut 25 bps in September, October, and December, with a target rate of 3.50% to 3.75% by the end of the year. Again, this is too late and too timid. It will have little impact on home builders for 2025, other than helping eliminate excess spec inventory.
If the Fed is too timid due to concerns about the tariff inflation effect, it should consider a move to quantitative easing, reinstating the buying of mortgage-backed securities. This would lower mortgage interest rates and stimulate the housing market.
Tariffs
Tariffs are the big bogeyman for the economy right now. The Fed and many economists are discounting good economic information with the fact that the tariff effect is coming. There’s been little effect so far, and there likely won’t be any. The reciprocal trade tariff negotiations are for “fair trade” to eliminate some of the imbalances, to open up markets for U. S. products and to reinvigorate U.S. manufacturing. When it’s all said and done, the tariffs should settle at about 15% to 18% for imports and exports. In June, the average weighted tariff rate in the U.S. based on tariff revenue was 10%.
The trade imbalance dates back to the end of World War II. From 1948 to 1952, the U. S. Marshall Plan aided economic recovery of the war-torn countries to help them get back on their feet. The average U.S. tariff on imported goods was between 1.4% and 3.0%, and other countries had restrictive tariffs on U.S. goods to block our exports to their countries and to stimulate our manufacturers to go overseas.
This imbalance has lasted for over 70 years. Our business schools have taught us for so long that we are no longer a manufacturing economy, but we are now a service economy. The current administration is working on bringing back manufacturing to the U.S. and truly making a global fair trade environment.
Mortgage Interest Rates
The Freddie Mac 30-year fixed rate mortgage rate has been hovering between 6.75% and 7.00% for much of the year. On July 31, the rate was 6.72%. To get homebuyers back in the market, the rate needs to be reduced to below 6.50%, preferably closer to 6.00% or below to open the flood gates.
There is plenty of need for housing. The two biggest age groups of our population are currently in the housing market or just entering it. Millennials are 29 to 44 years old. This is the largest age group, consisting of 74.2 million people, or 21.8% of the population. Gen Zers are 13 to 28 years old. They account for 20.8% of the population, or 70.8 million people. The backend of the millennials and the frontend of the Gen Zers will generally be in the starter home and multifamily segments of the housing market.
Existing Homes
Last year, sales volume of existing homes was the lowest since 1995, totaling only 4.06 million homes for the year. As of June 2025, the number of existing homes closed had decreased 1.4% from the first half of 2024. For the first half of 2025, only 1.94 million existing homes have been sold. There have only been two months where actual sales have exceeded last year’s sales. June sales came in at a seasonally adjusted rate of 3.93 million which was 2.7% below the rate in May. The available for-sale inventory has increased this year by 15.9% to 1.53 million homes. However, inventories are still tight, representing only 4.7 months of supply. The lack of inventory has restricted sales and elevated the median sales price for existing homes.
For a healthy existing home market, there should be over 5.0 million annual sales with around six months of inventory to allow for mobility. There has not been an annual sales volume over 5.0 million since 2022.
In June, the median sales price for existing homes reached an all-time record high of $435,300 which was 2.0% higher than one year ago. The median sales price recorded twenty-four consecutive months of year-over-year price increases.
New Homes
Residential building permits for the first half of 2025 have decreased 3.2% from last year with single family permits down 5.5%, two to four units up 6.0%, and multifamily (five or more units) up 1.0%. Construction starts by June have declined 1.0% from last year. Single family starts are down 6.9%, two to four units are up 52.0%, and multifamily starts have increased 15.7%. The strength shown for two to four unit and multifamily construction is due to the demand from the late millennial and early Gen Z populations entering the housing market and the affordability issues with purchasing single family homes.
New home sales for the first six months of this year have declined 4.3% compared to last year. All regions have registered declines in sales. Since last year, the inventory of new for-sale homes has increased 8.5%, representing 9.8 months of supply which is 16.7% above last year.
The reduction in sales and the excess inventory has softened the pressure on sales prices. Builders have been buying sales, offering flexible buyer incentives and mortgage buydown programs for as much as $20,000 (up to 5.0% of sales price), especially on standing inventory. Builders are now more concerned about volume of sales and construction than profit margin. They are beginning to move from incentives to outright sales price reductions to stimulate sales.
Since the beginning of the year, the median sales price for new homes has declined 6.5% to $401,800 from $429,600. The reduction is a combination of changes in the product mix (with buyers opting for smaller homes) and builders’ buyer incentive programs to capture sales.
The spread between the median sales price for existing homes and new homes is currently reversed and widening. The median sales price for existing homes is $435.500 while the median sales price for new homes is $401,800. This is a $33,500 spread, or a 8.34% upside-down difference. This is an unusual situation which will persist as long as there is excess new home inventory and builders are not able to hit their budget sales numbers.
To fully understand the dynamics of the housing industry, please visit our website to access my housing charts. There are several sets of charts with different baseline benchmarks to show the trends, the ebbs and flows of the industry over the years, and the impact of economic recessions and changes in the demographics of the homebuyer population.
Shinn Group is here to help. In addition to our robust management training curriculum, we offer customized consulting and coaching packages designed to help home builders thrive during economic uncertainty, grow and organize their businesses and gain control of costs and improve profitability. Contact us at 303-972-7666 or info@theshinngroup.com for details.
