Home construction projects stall as builder outlook plunges
Housing starts fell in January, and builders are less optimistic about the next six months as new federal policies could increase costs and reduce workforces.
At the end of 2024, things were looking up in the home construction sector. Sentiment and construction activity appear to have shifted in the new year, however, as builders become increasingly concerned about the cost of materials, labor shortages and mortgage rates.
New projects stalled: Housing starts were down 9.8% in January compared to the month before and off by 0.7% year-over-year, according to the U.S. Census Bureau. Single-family home starts were down 8.4% month-over-month and 1.8% year-over-year.
While building permits were flat for the month, they fell 1.7% compared to a year ago.
Housing completions were the one bright spot, jumping 7.6% from December to January and 9.8% year-over-year.
Builders in wait-and-see mode: The slowdown has resulted in 285,000 more completions than housing starts, a "growing gap" that "suggests some pessimism about building and selling new homes in the near future, but also some optimism about the current state of the market despite high mortgage rates," said Joel Berner, senior economist at Realtor.com.
Sentiment falls: After climbing for five months, builder confidence dipped five points in February, falling from 47 to 42, according to the NAHB/Wells Fargo Housing Market Index (HMI), which tracks the state of the single-family housing market based on three primary measures.
The biggest drop in sentiment was related to sales expectations for the next six months, which fell 13 points, possibly explaining the slowdown in housing starts. While builders are hopeful about regulatory changes, uncertainty about the "scale and scope of tariffs" has pushed the future sales outlook down to the lowest level since December 2023, said Robert Dietz, chief economist at the NAHB.
Builders are also scaling back incentives like price cuts, according to the monthly survey, which found that 26% of builders cut home prices in February. That's down from 30% in January and the lowest share since last spring.
New immigration policies, which are expected to lead to more deportations, are another concern for an industry that relies on immigrant workers. According to census data compiled by Pew Research, the construction sector has the highest share of unauthorized immigrant workers at 13%, beating out agriculture, forestry, fishing and hunting with a combined share of 12%.
Realtor.com Chief Economist Danielle Hale told Newsweek in January that the impact of immigration restrictions "is likely to be acutely felt by a construction industry that employs many foreign-born workers."
Things could improve later in the year: Even with the challenges facing the new construction sector, there are reasons for builders to remain hopeful, said Odeta Kushi, First American's deputy chief economist. Existing home inventory is still limited and the Federal Reserve will likely ease rates in the second half of the year, even if cuts are less aggressive than previously expected.
"Lower borrowing costs could provide some relief, but builders know that higher-for-longer mortgage rates will keep buyers cautious," Kushi said.