Opinion: Under pressure: Homebuilders adapt to a tough market

Richard Baker

Watching my daughter and her new husband work on their first home is exciting. It is a 65-year-old house, but it is a great fixer-upper. Homeownership is still a cornerstone of the American dream.

Now that the largest publicly traded homebuilders have reported quarterly earnings, I thought it might be a good time to check in on this part of the market and what it might mean to local homebuilders as well.

The industry’s S&P 500 Homebuilding Index has seen its stocks drop 34% from its October 2024 peak, which is much worse than the S&P 500’s drop of 3.8% over the same period. The commentary from these companies’ earnings calls shows that economic uncertainty and high mortgage rates are causing them problems, but tariffs aren’t expected to be impactful this year.

Homebuilders on tariffs, affordability
Regarding tariffs, Pulte said its gross margin was expected to decrease by 1% in the last half of the year as tariff prices increased. While D.R. Horton noted that it didn’t expect any tariff impact on profitability in 2025, but if the tariffs are still in place, they could hurt in 2026.

Approximately 20% of lumber in the U.S. comes from Canada, but these big homebuilders felt they could maneuver to U.S. lumber if tariffs came into play. The leadership teams for the big four homebuilding companies didn’t blame tariffs for their slowdown. Their biggest headwinds are affordability and overall buyer uncertainty.

Affordability, particularly around high mortgage rates, and buyers’ uncertainty remain the main reasons for slower home sales. Current homeowners are reluctant to give up their low mortgage rates, and first-time home buyers fear they can’t afford a mortgage payment with today’s rates.

Another significant headwind is uncertainty. The homebuilding business goes in cycles, and when Americans are uncertain about the overall economy, they are reluctant to make large financial decisions like buying a home with a long mortgage.

Been here before
Economic uncertainty, high interest rates and higher costs (labor, lumber, and bricks, oh my!) are all serious difficulties facing homebuilders. However, builders have been in this situation before and are good at navigating these cycles.

I was speaking recently with a homebuilder who typically builds four to five houses a year. Like the big homebuilding companies, he isn’t affected by tariffs yet, but his biggest problem is high mortgage rates. The builder, who typically builds $400,000-$600,000 houses, will now focus on small 1,000-square-feet houses that will sell in the $160,000 range, which he thinks will attract first-time buyers and those wanting to downsize. He will have to lower his margins to make them this affordable, meaning he will have to build twice as many homes a year as in previous years to maintain his overall profit.

The U.S. Chamber of Commerce released its State of Housing in America report in late March, saying there is currently a shortage of over 4.5 million homes. This gives homebuilders confidence that there will be long-term housing demand, and it offers buyers hope that most builders will stay in the business to keep prices down when they are ready to buy.

Having had two houses built, I agree that a great way to test a marriage is to go through the house-building process. Maybe I am a slow learner, but I finally learned on the second one to agree with whatever my wife wanted, which in the end made my life a lot easier. Hopefully, more Americans will get the opportunity to learn lessons through homeownership soon.

Richard Baker, an accredited investment fiduciary, is the CEO and executive wealth adviser at Fervent Wealth Management LLC in Springfield. He can be reached at
richard@ferventwm.com.