
As we look ahead to 2025, homebuilders are finding themselves in a tough spot, mirroring trends usually seen during economic downturns.
Recent data from the Census Bureau shows a slight uptick in new home sales over the past month, yet builders are still wrestling with supply issues, leading to an accumulation of unsold properties.
This surplus is a key factor behind the current slowdown in housing starts.
Current Market Dynamics
For the last couple of years, the monthly statistics for new home sales have remained relatively stagnant.
Typically, sales rise when mortgage rates dip, but the current reality of rising rates is creating headaches for builders and buyers alike.
Presently, the data on housing starts and permits suggests we may be in a recession, even as the number of completed homes continues to climb.
This growing imbalance has serious implications for construction jobs as we move into 2025.
Unfortunately, the outlook for growth in housing starts is grim as mortgage rates continue their upward trajectory alongside rising inventory levels.
Analysts are already speculating about potential job losses in the residential construction sector next year.
Earlier this year, we witnessed mortgage rates surge to around 7.50%, prompting the industry to record a negative labor report for residential construction—a significant signal of trouble.
Although rates recently dipped to around 6%, they have now jumped back above the 7% threshold.
Implications for Builders and Jobs
The ramifications of this situation extend beyond just the housing market.
A deceleration in private payroll growth, coupled with the relentless rise in mortgage rates, is intensifying pressure on the Federal Reserve and could inflate the unemployment rate as we head into the new year, especially if construction jobs become casualties.
Historically, drops in both housing permits and starts often precede job losses in residential construction, usually happening before the economy officially shifts into recession.
Data from the U.S. Census Bureau and the Department of Housing and Urban Development highlights that in November 2024, single-family home sales hit an annualized rate of 664,000—a 5.9% rise from the revised figure of 627,000 in October.
That’s an 8.7% year-over-year increase compared to the 611,000 sales in November 2023.
Charts depicting the state of new home sales reveal that while sales figures are relatively stable, the inventory levels keep climbing, pressing builders as they lose pricing power, particularly in southern markets.
To cope with these challenges, builders are trying strategies like offering lower mortgage rates, although this can eat into their profit margins.
In contrast to the existing home sales market—which has seen significant declines—the new home sales sector has managed to hold its ground, creating a higher bar for expectations.
Future Considerations for Permit Applications
At this time, roughly 120,000 newly completed homes are on the market.
While this number might not seem alarming at first glance, it encourages builders to tread carefully with new permit applications.
Moreover, many builders have numerous projects lined up that are yet to break ground, underscoring their need for clarity on mortgage rates before greenlighting more permits for single-family homes.
Despite the recent report showing an increase in new home sales, looming challenges persist, compounded by the potential for mortgage rates to keep rising.
Over the last two years, new home sales have significantly outperformed the existing home market.
Yet, the fundamental concerns lie in supply pressures and profit margins.
These dynamics are crucial for builders, who meticulously monitor their gross margins and projections for future sales.
Therefore, it’s no surprise that housing starts and permits have dwindled to levels reminiscent of a recession.
Builders have wisely chosen not to issue new permits for single-family and multifamily homes, anticipating further pressure on their margins if they pursue new projects.
Source: Housingwire