The persistence of uncertainty in the overall economy has contributed to a disappointing first half of 2025 for the housing market. Policy uncertainty, elevated interest rates, and ongoing affordability challenges remain key constraints, keeping many potential buyers on the sidelines.
“The new home market has not lived up to expectations so far in 2025,” says Ali Wolf, chief economist for Zonda. “There are consumers that want or need to move, but there’s really no urgency to make that decision today.”
In the new-home market, Zonda estimates May sales were down 5.8% year over year on a seasonally adjusted basis and down 5.3% on a non-seasonally adjusted basis. In the resale market, existing home sales declined 0.7% year over year in May.
“We are seeing sluggish home sales activity, though the one change we are seeing in the existing-home sales market is more inventory,” says Jessica Lautz, deputy chief economist and vice president of research at the National Association of Realtors (NAR). “But perhaps new inventory is not at the price point that home buyers are able to make purchases on. Current homeowners may not be super motivated to make a move unless there is a strong motivating factor.”
One metric that captures the subdued market is the NAHB’s Housing Market Index (HMI), which tracks home builder sentiment. In June, a combination of hesitant buyers, looming tariffs, and high rates drove the index to its third-lowest reading since 2012.
“The combination of elevated interest rates and policy uncertainty has pushed a number of home buyers to the sidelines, which has lowered our expectations for single-family home construction,” says NAHB chief economist Robert Dietz. “Right now, we are expecting single-family housing starts to be down about 5% in 2025. That’s a contrast from the beginning of the year, when we expected starts to be flat.”
To synthesize the evolving economic picture, Wolf, Dietz, and Lautz spoke with BUILDER to unpack the year’s slow start and important factors to monitor in the second half of 2025.
Tariffs, Rates, and Inflation
Uncertainty is the most powerful force shaping in today’s housing market. While more inventory has become available, prices have come down in some markets, and sellers are offering more incentives, ongoing uncertainty around interest rates and the broader economy continues to weigh on housing activity.
“There is nothing to suggest the bumpiness will settle down,” says Wolf. “We expect continued choppy sales and indecisive consumers.”
Dietz says a major unknown for builders is the future of tariff policy under the Trump administration. He expects tariffs will settle at rates below the ones proposed by the administration on Liberation Day but above rates seen in the market recently.
“Our surveys have indicated thus far builders have reported on average about an $11,000 impact from building materials suppliers who have raised prices either due to tariffs in place now or in the expectation of tariff policy that is coming,” Dietz says. “Just like the COVID-era lumber price increases, typically the bigger builders see the impacts of these policy changes last. It’s smaller contractors, remodelers, and smaller builders who will be first in line for any material cost increases.”
Dietz adds that nearly three-quarters of builders surveyed in the HMI have reported difficulty in pricing new homes due to cost uncertainty.
The lack of clarity around tariffs is also dampening consumer confidence. According to data from Federal Reserve Bank of New York, household inflation expectations rose in the first half of 2025. Such consumer expectations likely will impact the behavior of the Federal Reserve, which has elected to hold rates steady in 2025 despite pressure from the administration.
“Those higher inflation expectations can be self-fulfilling. When businesses can see consumers are expecting higher inflation, businesses are more likely to raise their own prices,” Dietz says. “If we want the benign economic outcome to occur, hopefully some of those household level inflation expectations become subdued.”
Demand Patterns
With many buyers still hesitant and remaining on the sidelines, builders continue to rely on incentives to drive sales. Wolf says incentives remain “the name of the game” in the soft market, with some builders thinking outside the box beyond standard closing cost, rate buydown, and design credit incentives.
“We are also seeing some non-traditional incentives like builders paying for travel for consumers shopping from outside the metro,” says Wolf. “Larger builders are typically in a better place to offer more aggressive incentives and/or price cuts. Smaller builders will try to compete, but the cost of doing business today is leading to massive margin compression and a tricky market to navigate.”
Partly due to the widespread use of incentives and an increase in resale inventory, Dietz projects price indicators such as the Case-Shiller Index will show softness over the next 12 months as builders and the resale market continue to search for the market.
In the resale market, all-cash buyers remain elevated, accounting for roughly 25% of all transactions in April. Sales in the luxury segment are outperforming entry-level activity, although the discretionary nature of luxury purchase means those buyers can pull back from the market whenever they begin to lack confidence, Wolf notes.
While activity in the entry-level new-home market is constrained, the share of first-time buyers in the resale market has ticked up from recent lows.
“We are looking at 34% of home sales in the month of April that were attributed to first-time buyers. If we look in a healthy market, it is about 40%,” says Lautz.
Regional Trends
Wolfe highlights the Northeast as a standout region in the new-home market due in part to low levels of resale supply.
“Builders really cannot move the needle on supply. As such, well-positioned, well-priced homes are still flying off the shelves, often with bidding wars and selling over asking price,” Wolf says.
In contrast, several markets in the Sunbelt region are experiencing an increase in competition from the resale market. Approximately 60% of the top housing markets have higher level of supply compared to 2019, with a large concentration of this share in the Southeast and Sunbelt areas. In areas like Florida, Louisiana, and Austin, Texas, home prices have declined amid a resurgence of resale inventory.
“This price softening is going to be something that really gets more attention as we move into the back half of 2025,” says Dietz.
