Record-cold temperatures stifled home building

February 19, 2025

Housing starts, another name for new home construction, plunged 9.8% in January as both single and multifamily starts receded. Compared to a year ago, construction was down 0.7%. Mortgage rates above 7.0% and below average temperatures in much of the South and Midwest, including record-breaking cold and snow in the Gulf coast, held back new activity.

Single-family starts dropped 8.4% in January while December starts were revised up above one million units. That seems to be the speed limit to how much builders can produce in a year. Tight labor conditions and rising input costs pose hurdles to builders looking to tap into pent-up homebuyer demand. The number of single-family units completed rose 7.1% in January to 982,000 units, still significantly below what is needed to meet demand.

The largest builders have been offering mortgage rate buydowns and other incentives to help bring buyers through the door. The use of incentives slipped to 59% in February compared to 61% in January. Smaller builders less able to offer incentives are sitting on higher unsold inventory levels. We expect to see consolidation in the industry.

Multifamily starts cratered 11% for January but were still 2.3% higher than a year ago. Multifamily starts have been subpar since mid-2023 when builders were working through record levels of apartments under construction. That pipeline is drying up, with fewer projects in the works. Recent declines in rents will be short-lived as apartment demand remains strong while less supply coming on line will push up rents.

Building permits, which indicate future construction activity, eked out a 0.1% gain on higher multifamily permits. Single-family permits came in flat for the month. Expectations of rent increases helped boost permit applications.

Home builder sentiment, as measured by the National Association of Home Builders, fell this month to the lowest level since September. Builders are nervous about the rising costs of inputs with more tariffs expected on materials. Those who responded to the survey before the new tariffs on Canada and Mexico were put on pause reported sentiment significantly lower than those who responded after the 30-day pause was announced.

Mortgage rates are adding insult to injury; builders’ sales expectations for the next six months dropped to the lowest level since December 2023. The average 30-year fixed mortgage rate crossed above 7% in January but has fallen slightly lower since then. 

According to the producer price index, prices for lumber, cement, aluminum, copper, gypsum and other inputs jumped during the first part of January. That was before any new tariffs. Some producers are front-running tariffs by preemptively increasing prices, while buyers are stocking up in hopes of getting ahead of price increases. This can be a self-fulfilling prophecy that drives prices higher.

The housing market recovery is not expected to occur until the end of this year or later. The bond market has decoupled from earlier rate cuts by the Federal Reserve, with rates rising and taking mortgage rates with them since hitting a low in September. We are not expecting much relief for builders until well into 2026.