Tariffs and Rates Push U.S. Housing Market to 5-Year Construction Low

Source: YouTube

The U.S. housing market is facing renewed pressure as housing starts in May fell nearly 10% month over month, reaching the lowest pace since the early pandemic in 2020. At a seasonally adjusted annual rate of 1.26 million homes, the latest figure surprised economists and further highlighted the widening gap between housing demand and available supply. Homebuilders cite a mix of high borrowing costs, volatile tariffs, and excess unsold inventory as reasons for cutting back on new construction.

Permits for new homes also dropped, declining to their lowest level in five years. Single-family home approvals were particularly weak, falling to an annual rate of 898,000. Taken together, the data paints a bleak short-term outlook for the residential construction sector.

Construction Slowdown Deepens Supply Shortage

Economists had expected a soft reading, but not to this degree. The nation continues to fall well short of the 2 million housing starts per year that analysts estimate are needed to close the supply gap. According to Navy Federal Credit Union chief economist Heather Long, the current pace not only fails to meet demand, but threatens to deepen affordability challenges, especially for first-time buyers.

Builder sentiment continues to slide. The National Association of Home Builders (NAHB) said confidence has reached its lowest point since 2022. Developers report being forced to cut prices, offer costly buyer incentives, and hold more unsold inventory than expected. Those dynamics are pressuring margins and discouraging new investment.

Tariffs and Input Costs Add to Industry Burden

A critical factor behind the housing construction retreat is the rising cost of inputs. Tariffs on steel, aluminum, and now potentially lumber have become a new headwind under President Trump’s trade policies. The administration has doubled existing tariffs on key building materials and proposed even broader levies that could take effect later this summer. Builders now face higher costs without the ability to reliably pass those expenses on to buyers.

“Homebuilding continues to face heavy headwinds amid high input prices, elevated borrowing costs, increasing inventory, and tariffs now also adding to the mix,” said BMO Senior Economist Priscilla Thiagamoorthy.

Ali Wolf, chief economist at Zonda, noted that builders are struggling to price future projects amid the uncertainty. “If builders want to compete they now have to offer a lot of concessions,” she said. “That compresses margins and discourages starts.”

Financing Conditions Remain Tight

Mortgage rates, while down slightly from last year’s peaks, continue to weigh heavily on affordability. The 30-year fixed rate averaged 6.84% in mid-June, far above pandemic-era lows and still near two-decade highs. These borrowing costs limit what buyers can afford and put further downward pressure on sales volume.

Even large homebuilders are feeling the pinch. Lennar, one of the nation’s biggest players, recently reported weaker-than-expected earnings, citing market softness and higher build costs. Its leadership echoed the view that tariffs, labor constraints, and permit delays are suppressing new construction activity.

Investor Caution as Broader Housing Market Risks Mount

This latest housing market contraction comes amid broader signs of economic hesitation. While the Federal Reserve chose not to raise rates in its most recent meeting, there are few indications of a near-term pivot. Some analysts say the slowdown in housing—combined with lagging consumer demand and persistent inflation risks—may force the Fed to reevaluate later in the year. Until then, most builders appear poised to sit on the sidelines.

The real concern for investors is that housing’s weakness could spread. The sector, long viewed as an early signal for broader cycles, is now flashing red. Unlike prior soft patches, today’s downturn is colliding with restrictive monetary policy and unpredictable trade conditions.

Is the housing market slump temporary, or a sign of deeper cracks in the U.S. economy? Tell us what you think.

Survey

 Loading ...