It’s now half a decade since anything in the US housing market could be considered normal. The pandemic boom was followed by a transaction bust, induced by the central bank, that did little to lower sky-high prices. Going into 2025, a lack of affordability continues to sideline buyers, while potential sellers feel stuck in place, tied down by Covid-era mortgages. The slump in transactions has hurt real estate agents, lenders and furniture companies. Homebuilders, until now somewhat insulated from the housing blues, are beginning to feel pressured by a buildup in inventory, and multi-family landlords, by a rise in vacancy rates. Lower mortgage rates should help, but there’s little indication of that happening soon and some signs that borrowing costs may get worse before they get better.
Will Trump’s agenda push mortgage rates higher?
Businesses and investors have largely cheered the news of Donald Trump’s return to the White House with a pro-growth agenda of tax cuts and deregulation. Stocks tied to the housing industry haven’t shared the enthusiasm. The iShares US Home Construction exchange-traded fund has slumped about 15% since Election Day, partly because of a surge in 10-year US Treasury yields. What the housing industry needs more than anything else in the new year is lower mortgage rates. Lower taxes and cutting red tape just won’t move the needle as much as home buyers seeing 5.50% home-loan rates again. That would make what’s currently an unaffordable market seem within reach once more, unfreezing transactions of both existing and new houses.
Instead, the 30-year mortgage rate is back above 7% after fallen into the low 6% range in September, rising along with Treasury yields. The prospect of a stronger economy and faster inflation will only push that benchmark higher, or at least leave it at elevated levels next year. This is very different from the scenario that Trump walked into in 2017. Mortgage rates were then around 4%, consumers hadn’t been scarred by four years of too-high inflation, and there were few negative tradeoffs to further stimulating the economy. That same home construction ETF rose by over 50% in the 12 months following Election Day in 2016. Trump’s reputation is intertwined with real estate, and the tension between the MAGA agenda and what it means for real estate might be one of the defining economic tensions of his second term in office.
Whether or not to build
It has felt like the housing market nationally ground to a halt once mortgage rates first rose above 6% in September 2022. But beneath the surface, there’s been a lot of change. Resale transactions have fallen to a pace as slow as we saw in the aftermath of the 2008 financial crisis, and inventory levels have risen as homebuilders have largely kept building, particularly in the South where they do most of their business.
The continued increase in inventory is now putting pressure on homebuilders, particularly as mortgage rates stay stubbornly high. The use of incentives to win over skittish buyers has increased in recent months, hurting profit margins. New home inventory levels appear to finally be hitting levels that warrant caution from homebuilders as we head into 2025. A pullback in construction should start to feel mildly recessionary for residential construction workers before too long.
The two-tier housing market
In a normal housing market, there’s a steady state of migration as homeowners in the expensive Northeast and Midwest of the country sell and move to higher-construction and relatively cheaper states such as Florida, Texas and Arizona. With resale housing activity about 25% to 30% below normal levels, those migration patterns have slowed. Fewer departures from the Northeast and Midwest are causing a housing shortage in metros that haven’t built much in recent decades due to a mix of low population growth and restrictive zoning laws. Sun Belt markets, on the other hand, are seeing less demand from out-of-state buyers than they’re accustomed to, leading to rising inventory, price stagnation, and potentially a decline in construction activity and employment in 2025. So, while there aren’t enough houses on the market in Chicago and Connecticut, there are plenty for sale in Dallas and many Florida markets.
Lower mortgage rates would presumably increase housing activity and normalize migration levels. But if mortgage rates stay high, there will be even more pressure on policymakers in the Northeast and Midwest to get more housing built, and homebuilders in Sun Belt metros will be forced to cut back. Home values have increased by around 7% over the past year in Chicago, Cleveland and New York City, while Dallas and Tampa have seen a 1% rise, according to the S&P CoreLogic Case-Shiller indexes. Heading into 2025, the national housing market doesn’t look weak enough for broad-based price declines, but sharp regional divergences should continue until inventory trends stabilize.
Homebuilding and mass deportations
The last thing homebuilders need right now is action from the White House that raises costs. Yet that’s exactly what can be expected if the Trump administration moves forward with its plans for tariffs and the mass deportation of undocumented immigrants. Lennar Corp. said this month that tariffs could add $5,000 to $7,000 to the cost of each home it builds despite the homebuilder having shifted much of its supply chain to domestic companies and away from Chinese and other Asian manufacturers. Deportations as well as tighter immigration controls will also raise labor costs. Goldman Sachs Group Inc. estimates that unauthorized immigrants make up 13% of construction workers, a number that climbs to 26% once all immigrants are counted. In states such as New York, Florida, Texas, California and Nevada, immigrants comprise around 40% of the construction labor force, according to a report from the National Association of Home Builders. These considerations arguably played into the thinking of central bank officials this month, when their boosted their inflation forecast for 2025 while largely leaving the growth projection unchanged.
The multi-family rollercoaster
The multi-family industry is in an unusual place heading into 2025. The past year was painful for many landlords as a ton of new supply resulted in low to negative rent growth. That trend should continue next year, particularly in oversupplied metros such as Austin, Nashville, Phoenix, Charlotte and Atlanta, where vacancy rates are high. At the same time, a slump in new construction is leading to a widespread belief that better times await.
The industry and investors will be watching for how quickly apartment completions start to taper off, vacancy rates fall, and rent growth picks up. There’s a strongly held view that by 2026 and especially into 2027, we’ll have apartment shortages again, rents growing rapidly, and a need to build to meet demand. What’s uncertain is how quickly balance is restored and we transition from bust to emerging boom.
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