The upcoming spring home-selling season is expected to be tough for prominent homebuilders, primarily due to the potential for a trade dispute and elevated mortgage rates.
In recent years, homebuilders have been eager to construct new homes to ease the resale market’s inventory issues, as high borrowing costs have deterred homeowners from selling. However, with mortgage rates remaining high and economic instability, builders are now encountering challenges.
“We anticipate that the difficult conditions for homebuilders will continue through [the first half of 2025],” noted Rafe Jadrosich, a homebuilders and building products analyst at Bank of America Securities, in a communication to clients.
Signs of trouble are becoming apparent.
For example, DR Horton (DHI), the largest homebuilder in the United States, reported a 1% drop in net orders for the first fiscal quarter ending December 31, compared to the previous year. Homebuyers signed contracts for 17,837 homes in the quarter, falling short of analysts’ projections of 18,478.
To boost sales, builders like Horton have been providing incentives such as mortgage rate buy-downs and downsized homes. Unfortunately, these strategies have adversely affected profit margins.
DHI’s profit margin decreased by 90 basis points in December from the previous quarter as a result of increased incentive costs, and they foresee these costs rising further. This implies lower gross margins of 21.5% to 22% in the second quarter, compared to 22.7% in the first quarter.
Nevertheless, DHI executives remain optimistic that the spring season will mark a positive change.
“We need the spring to arrive for us to witness sales growth,” DHI CEO Paul Romanowski shared during the company’s fiscal 2025 Q1 earnings call in late January.
Jay McCanless, a senior vice president of equity research at Wedbush Securities, shares this optimism but believes a successful selling season hinges on consistent mortgage rates.
“If we achieve stability in rates, the spring selling season is likely to improve as it progresses,” McCanless told Yahoo Finance. “However, I am quite concerned, as are the builders, about the volatility in mortgage rates and how that impacts buyer sentiment.”
Read more: 2025 housing market: Is it a good time to buy a house?
This uncertainty is also evident at Toll Brothers (TOL), which has revised its home delivery forecast downward. The builder now expects to finalize 2,500 to 2,700 sales in its fiscal second quarter, below analysts’ expectations of 2,781.
“While demand was robust in our first quarter, we’ve seen mixed results in the current spring selling season,” Toll Brothers CEO Douglas Yearley mentioned during the company’s fiscal Q1 earnings call this week.
“While demand has remained healthy in several markets, particularly at the higher end, issues related to affordability and increasing inventories in some areas are pressuring sales, especially at the lower end,” he added.
A further indication of housing market weakness is the slowdown in existing home sales during January, as high prices and mortgage rates stifled activity.
Other analysts on Wall Street argue that the hurdles extend beyond mere demand.
Jadrosich highlighted rising land prices and the increasingly competitive market resulting from higher inventories.
According to the National Association of Home Builders, the number of newly completed ready-to-occupy homes surged by 46%, climbing to 118,000 compared to last year. New homes currently represent 30% of the available homes for sale, mirroring December’s pace from the previous year.
Data from Wolfe Research indicates that if builders manage to pass on increased construction expenses and raise a new home’s price by $10,000, the monthly payment would rise by $48, increasing from $2,470 to $2,518, assuming a 6% mortgage rate buy-down. (AP Photo/Ross D. Franklin) ·ASSOCIATED PRESS
A further concern for builders arises from President Trump’s executive order implementing a 25% tariff on all imported steel and aluminum products, effective in March. The National Association of Home Builders has cautioned that this could elevate residential construction expenses, which could ultimately be passed on to consumers, pushing home prices higher and negatively affecting home sales.
Wolfe Research has suggested that if builders are able to transfer those higher construction costs and increase the price of a new home by $10,000, the monthly housing payment would rise by $48, going from $2,470 to $2,518 with a 6% mortgage rate buy-down.
Read more: What are tariffs, and how do they affect you?
Smaller builders are starting to exercise caution regarding the housing market as they deal with tariff concerns, high mortgage rates, and escalating housing costs. This uncertainty is reflected in a five-point decline in homebuilder confidence, marking the lowest level in five months.
While housing affordability continues to be a significant issue, Trevor Allinson, director and senior research analyst at Wolfe Research, explained to Yahoo Finance that “the larger hurdle is land inflation.”
He elaborated, “Depending on the builder, land prices could rise anywhere from mid-single to high-single digits in 2025. This could represent about a quarter of a builder’s average selling price, potentially leading to a couple of hundred basis points of gross margin pressure.”
Dani Romero is a reporter for Yahoo Finance. Follow her on X @daniromerotv.
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