The spring home-selling season is shaping up to be challenging for major homebuilders, largely because of the possibility of a trade war and high mortgage rates.
Over the past few years, homebuilders have rushed to build new houses to help alleviate the shortage in the resale market, as high borrowing costs discouraged homeowners from selling. But now, with mortgage rates still elevated and economic uncertainty, builders are facing obstacles.
“We expect the challenging environment for homebuilders to persist through [first half of 2025],” Rafe Jadrosich, homebuilders and building products analyst at Bank of America Securities, wrote in a note to clients.
The cracks have started to show.
For instance, DR Horton (DHI), the nation’s largest homebuilder, reported a 1% decrease in net orders for the first fiscal quarter ended Dec. 31 compared to the same period last year. Buyers signed contracts for 17,837 homes in the quarter, falling short of analysts’ expectations of 18,478.
To bolster sales, builders like Horton actively offered incentives such as mortgage rate buy-downs and smaller homes. The bad news? These efforts impacted margins.
DHI’s margin fell 90 basis points in December from the prior quarter due to higher incentive costs, and they expect those costs to increase. That means lower gross margins of 21.5% to 22% in the second quarter compared to 22.7% in the first quarter.
Still, executives at DHI remain hopeful that the spring season will be a turning point.
“We need the spring to show up for us and to see the sales,” DHI’s CEO Paul Romanowski told investors and analysts on the company’s first fiscal 2025 quarter earnings call in late January.
Wedbush Securities senior vice president of equity research Jay McCanless shares the optimism but believes a robust selling period is contingent on a more consistent mortgage rate environment.
“If we get some rate stability, then the spring season probably continues to improve as it progresses,” McCanless told Yahoo Finance. “But I’m very worried, as are the builders, about mortgage rate volatility and what that does to buyer psyche.”
Read more: 2025 housing market: Is it a good time to buy a house?
The uncertainty is further reflected in Toll Brothers (TOL), which lowered its guidance for home deliveries. The builder expects to close 2,500 to 2,700 sales in its fiscal second quarter, below analysts’ estimates of 2,781.
“Although demand was solid in our first quarter, we have seen mixed results so far this spring selling season,” Toll Brothers CEO Douglas Yearley told investors and analysts on the company’s fiscal first quarter earnings call this week.
“While demand has remained healthy in many of our markets and particularly at the higher end, affordability constraints and growing inventories in certain markets are pressuring sales, especially at the lower end,” he added.
Another sign of weakness in the housing market, sales of existing homes slowed in January as high home prices and elevated mortgage rates dampened housing activity.
Other Wall Street analysts believe the challenges go beyond demand.
Jadrosich pointed to rising land prices and a more competitive selling environment due to things like higher inventory.
Data from the National Association of Home Builders showed a 46% increase in the number of completed ready-to-occupy new homes, rising to 118,000 from the previous year. New homes now account for 30% of homes on the market for sale, maintaining the same December pace as last year.
Data from Wolfe Research suggests that if builders can pass along those increased construction costs and raise the price of a new home by $10,000, the monthly housing payment will go up by $48 from $2,470 to $2,518, assuming a 6% mortgage rate buydown. (AP Photo/Ross D. Franklin) ·ASSOCIATED PRESS
Another concern for builders stems from President Trump’s executive order imposing 25% tariffs on all imported steel and aluminum products, effective in March. The National Association of Home Builders warns this could increase residential construction costs, which could be passed down to consumers and drive up home prices and thus impact home sales — and not in a good way.
Data from Wolfe Research suggests that if builders can pass along those increased construction costs and raise the price of a new home by $10,000, the monthly housing payment will go up by $48 from $2,470 to $2,518, assuming a 6% mortgage rate buy-down.
Read more: What are tariffs, and how do they affect you?
Smaller builders are becoming more cautious about the housing market as they navigate concerns over tariffs, elevated mortgage rates, and high housing costs. The uncertainty was reflected in a five-point drop in homebuilder confidence, which reached the lowest level in five months.
While housing affordability will remain a key issue, Trevor Allinson, director and senior research analyst at Wolfe Research, told Yahoo Finance “the bigger headwind is land inflation.”
He explained, “It depends on the builder but [land prices] could go up anywhere from mid-single digits to high single digits in 2025. That’s roughly a quarter of a builder’s [average selling price] so I think that could be a couple of 100 basis points of a gross margin headwind.”
Dani Romero is a reporter for Yahoo Finance. Follow her on X @daniromerotv.
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