Is your market ‘a lion or lamb’? Building permits offer a clue 

There are a lot of unknowns heading into the spring homebuying season — will the Fed cut interest rates? Will economic policies drive up inflation? Have buyers already given up? But one sector of the housing industry could offer some clarity at the local level: new home construction.

A new report from First American found significant differences in home price appreciation depending on how many building permits were issued in a given metro. Generally speaking, metro areas in the South have higher-than-average new home construction activity and are seeing affordability improve, while the Northeast and Midwest are seeing less construction — and higher home prices.

The combination of slowing home price growth and more inventory as a result of increased construction could be what's needed to lure some buyers off the sidelines this spring.

"Our analysis of recent regional construction trends suggests the degree to which the market is a lion or lamb will be influenced by recent homebuilding trends," Sam Williamson, senior economist at First American, said in the report.

How building activity affects price growth: Among the 50 largest markets, Austin had the highest rate of building permits per 1,000 households in February, with a slight decrease (down 0.14%) in home appreciation. Tampa saw the biggest decrease in home prices (down 3.76%) while also having a higher-than-average number of building permits issued.

On the other end of the spectrum, Pittsburgh — an area with below-average construction activity — posted the biggest annual increase in home prices (up 9.97%). The cities that issued the fewest residential building permits — Buffalo, New York, and Providence, Rhode Island — also saw prices jump by more than 9%.

Not every metro saw a clear correlation between building permits and price growth, however. Even with low construction activity, home prices fell in San Diego and San Francisco, while Louisville issued more permits than the average city but also saw home prices jump by more than 10%.

More construction = more supply = more hope for buyers: "As we approach the 2025 home-buying season, increased residential construction activity offers a glimmer of hope for prospective buyers by boosting overall housing supply and, in turn, enhancing affordability," Williamson said. 

"However, our analysis of recent regional construction trends reveals that this growth is not evenly distributed across the country but, where builders are raising roofs, they are also helping to slow or lower prices."

And builders are raising lots of roofs in the South, which tends to have more available land and less restrictive zoning laws, Williamson noted. For buyers, "demand-side factors, like lower living costs and relatively more affordable housing options, will continue to attract new residents to these regions and further encourage additional construction — a virtuous cycle."

Affordability tightrope: With buyers increasingly squeezed by high home prices and high borrowing costs, it doesn't take much to put homeownership out of reach. A $1,000 increase in the median price of a new home would push 115,593 people out of the market, according to the National Association of Home Builders. 

Nearly 75% of U.S. households cannot afford to buy a median-priced new home, and in 23 states and the District of Columbia that share exceeds 80%. 

"This indicates a significant disconnect between rising home prices and household incomes," said Na Zhao, an economist at NAHB.

Mortgage rate uncertainty: Borrowing costs will continue to influence affordability and buyer demand for new and existing homes alike, and it remains unclear where mortgage rates are going next. The latest inflation report showed some easing, but probably not enough to prompt the Federal Reserve to lower interest rates, Williamson said.

Also, the inflation numbers are based on February data — before many of the tariffs took effect — so that easing could be short lived. Tariffs could keep mortgage rates elevated, but if they also spur a significant slowdown in the economy, that could send rates lower.

"It may be several weeks before we know how the push-and-pull of economic factors will impact mortgage rates and consumer behavior and, ultimately, the performance of the housing market," said Lisa Sturtevant, chief economist at Bright MLS.