New construction momentum stalls as costs expected to rise 

The latest data on new home construction offered a mixed bag of news, which seems to be the trend across the economy these days. While there were gains in some areas, builder optimism continues to wane.

First the good news: Despite concerns about on-again, off-again tariffs and eroding consumer confidence, housing starts rebounded in February, rising 11.2% following a very slow January, according to the U.S. Census Bureau. 

The annual rate of 1.5 million starts exceeded consensus expectations of 1.4 million, said Odeta Kushi, First American's deputy chief economist. She noted that January was particularly tough on home builders because of the colder-than-usual weather and mortgages in the 7% range.

But … construction lags behind last year: Even with the rebound, total housing starts were still down 2.9% year-over-year in February, while single-family starts were down 2.3%.

And those numbers could remain low in the coming months, as fewer building permits were issued in February. Overall permits were down 6.8% compared to a year earlier, and single-family home permits fell 3.4% year-over-year. Housing completions were also down 6.2% year-over-year, with single-family completions down 1%. 

These are signs that new home construction is slowing after being one of the few bright spots in real estate last year. 

Builder confidence wanes: Home builders appear to be bracing for a tougher year. Following five months of increasing confidence, builder sentiment dipped in February and fell again in March, according to the National Association of Home Builders' monthly survey. The index — which measures perceptions of current home sales, expectations of future sales and buyer traffic — now sits at 39, the lowest level in seven months. Prospective buyer traffic posted the biggest drop, falling five points to 24.

Regionally, builders in the Northeast remain the most confident, with a rolling index score of 54, while the Midwest and South came in at 42 and the West dropped to 37.

Along with tariff concerns, builders are dealing with supply-side challenges including labor and lot shortages, said Robert Dietz, chief economist at the NAHB, but they remain hopeful about regulatory changes that are expected to reduce costs.

Buyers may be priced out of new homes: Builders aren't the only ones affected by policy issues, particularly around tariffs. "Consumers also are going to feel the impacts," said Lisa Sturtevant, chief economist at Bright MLS.

In the latest NAHB survey, builders estimated tariffs will add $9,200 to the final cost of a new home — something that "home buyers may not be willing, or able, to pay," Sturtevant noted. 

And as more existing-home listings hit the market this spring, new homes will face greater competition. "As a result, it could be a challenging year for home builders."