Builder confidence declined in March for the second consecutive month as economic uncertainty, tariff concerns and high construction costs continued to pressure the industry. Builders are struggling with rising material expenses, which have been impacted by tariff-related issues. In addition to cost pressures, ongoing labor shortages and limited lot availability have made it increasingly difficult to meet demand.

According to the National Association of Home Builders (“NAHB”)/Wells Fargo Housing Market Index (“HMI”), builder confidence in the market for newly built single-family homes fell three points to 39 in March from February. This marks the lowest level in seven months, reflecting ongoing challenges in the housing sector.

HMI Insights & Market Pricing Trends

In March, two of the three major HMI indices declined, reflecting ongoing challenges in the housing market. The index for current sales conditions dropped three points to 43, the lowest since December 2023, whereas the gauge for prospective buyer traffic fell five points to 24, indicating weaker demand. Meanwhile, sales expectations for the next six months were unchanged at 47, indicating a lack of optimism in the market.

The three-month moving averages for regional HMI scores declined across all regions in March. The Northeast and the Midwest dropped three points each to 54 and 42, respectively. The South recorded a four-point decline to 42, and the West decreased by two points to 37. These shifts indicate weakening homebuilder sentiment across different areas.

Rising construction expenses and a limited supply of buildable land have added strain to the housing market, making it harder for builders to manage costs. Increasing material and labor prices have pressured profitability, leading to adjustments in home pricing and sales approaches. In March, 29% of builders reduced home prices, up from 26% in February, with an average price cut of 5%, unchanged from the previous month. Sales incentives were steady at 59%, reflecting ongoing efforts to attract buyers.

What’s Slowing Down Homebuilding Industry?

The homebuilding industry faces ongoing challenges as uncertainty over interest rates continues. At the Federal Reserve’s first meeting of 2025, no clear guidance was given on how long borrowing costs will remain high. There were three consecutive rate cuts in 2024, bringing the federal funds rate to 4.25-4.5%. However, further reductions seem unlikely in the near term. The Federal Open Market Committee is expected to hold rates steady in its upcoming meetings on March 18 and March 19 unless inflation slows further. The Consumer Price Index rose 2.8% in February from the prior year, slightly lower than January’s 3% increase but still above expectations.

Adding to these challenges, mortgage rates have shown little movement, keeping borrowing costs high. According to Freddie Mac, the average 30-year mortgage rate was 6.65% as of March 13, barely changing from 6.63% in the previous week. The 15-year mortgage rates inched up slightly to 5.8% from 5.79%. With borrowing costs remaining high, affordability concerns persist, limiting housing demand and slowing new construction.

Economic uncertainty remains a major concern for homebuilders, with trade and tax policies adding to inflation risks. President Donald Trump’s tariff, immigration and tax policies could drive prices, making it even harder for the Federal Reserve to justify rate cuts.

According to NAHB chief economist Robert Dietz, recent tariff actions have raised the cost of building a typical home by an estimated $9,200. The uncertainty surrounding these policies is also affecting buyer confidence and development decisions, straining the market.

At the same time, a persistent shortage of skilled labor remains a significant challenge. With rising demand for housing, the industry requires more trained workers to keep up with construction needs. However, labor shortages continue to slow project timelines and hike costs, making it even harder for builders to manage expenses. This ongoing workforce gap is adding to the difficulties already faced by homebuilders in an increasingly constrained market.

What’s Acting in Favor of Housing Market?

While ongoing economic uncertainties continue to weigh on the housing sector, some factors are providing support. The Trump administration’s decision to pause the 2021 IECC building code requirement and revise the regulatory definition of "waters of the United States" under the Clean Water Act has eased some of the cost burdens for builders.

Although mortgage rates recently moved higher, they remained near a three-month low, drawing more buyers into the market. Moreover, the new home sales inventory at the end of January increased to 495,000 from 494,000 in December, as per the latest U.S. Census Bureau release. This represents a supply of 9 months at the current sales rate, up from 8.5 months. The combination of modestly lower mortgage rates and improving inventory is a positive sign for homebuyers in this critical spring homebuying season, with mortgage applications rising 7% and refinancing applications increasing 16% for the week ending Friday, per Mortgage Bankers Association data.

Image Source: Zacks Investment Research

The Zacks Building Products - Home Builders industry declined 2.2% last month, faring better than the Zacks Construction sector and the S&P 500, which dropped 7.1% and 8.5%, respectively.

Despite ongoing market challenges, homebuilders like Dream Finders Homes, Inc. (DFH Quick QuoteDFH - Free Report) , Toll Brothers (TOL Quick QuoteTOL - Free Report) and NVR, Inc. (NVR Quick QuoteNVR - Free Report) , carrying a Zacks Rank 3 (Hold), are demonstrating resilience. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

These companies are navigating industry headwinds through strategic initiatives, focusing on operational efficiency and financial stability to maintain performance in a volatile environment.

Dream Finders Homes: This Jacksonville, FL-based homebuilder specializes in affordable and customizable homes, attracting buyers despite higher borrowing costs. Also, strong cost management and operational efficiency are encouraging, while a solid backlog of homes signals steady future revenues. In 2024, net new orders rose 17% year over year to 6,727 units.

The company demonstrates solid fundamentals, with a strong VGM Score of A, supported by an impressive Value and Momentum Score of A, respectively, alongside a Growth Score of B. Dream Finders Homes’ earnings estimates for 2025 have increased to $3.14 per share from $3.11 over the past 30 days.

Toll Brothers: This Horsham, PA-based homebuilder reported 2,307 net contracts worth $2.3 billion in the first quarter of fiscal 2025, marking a 13% year-over-year increase in units and a 12% rise in value. The company continues to expand spec production, geographic reach and product offerings while focusing on operational and capital efficiency. Backed by these strategic efforts, home deliveries for fiscal 2025 are expected between 11,200 and 11,600 units, suggesting a rise from the 10,813 reported in fiscal 2024.

NVR: Headquartered in Reston, VA, this homebuilder is engaged in the construction and sale of single-family detached homes, townhomes and condominium buildings, all of which are primarily constructed on a pre-sold basis. A disciplined business model and a focus on maximizing liquidity and minimizing risks have been aiding NVR. The lot acquisition strategy helps the company avoid financial requirements, and risks associated with direct land ownership and land development.  In 2024, the company’s new orders (net of cancellations) increased to 22,560 units from 21,729 units in 2023.