Homebuilder sentiment falls in February amid tariff worries

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Homebuilder sentiment falls in February amid tariff worries

Sentiment among the nation’s single-family homebuilders dropped to the lowest level in five months in February, largely due to concern over tariffs, which would raise their costs significantly.

The National Association of Home Builders’ Housing Market Index (HMI) dropped a sharp 5 points from January to a reading of 42. Anything below 50 is considered negative sentiment. Last February, the index stood at 48.

“While builders hold out hope for pro-development policies, particularly for regulatory reform, policy uncertainty and cost factors created a reset for 2025 expectations in the most recent HMI,” said NAHB Chairman Carl Harris, a home builder from Wichita, Kansas.

Of the index’s three components, current sales conditions fell 4 points to 46, buyer traffic fell 3 points to 29 and sales expectations in the next six months plunged 13 points to 46. That last component hit its lowest level since December 2023.

Builders are already facing elevated mortgage rates. The average rate on the 30-year fixed was over 7% for January and February after earlier being in the 6% range. Home prices are also higher than they were a year ago, weakening affordability further.

While President Donald Trump’s tariffs on Canada and Mexico, originally proposed to take effect in early February, were delayed roughly a month, builders are still expecting higher costs.

“With 32% of appliances and 30% of softwood lumber coming from international trade, uncertainty over the scale and scope of tariffs has builders further concerned about costs,” said NAHB chief economist Robert Dietz.

Homebuilder sentiment had been gaining steadily since August on the expectation of lower mortgage rates and, as the builders noted, potential pro-development policies. Single-family housing starts are trending lower than they were a year ago, despite a lean supply of existing homes for *****.

The drop in builder sentiment, coming right before the all-important spring market, signals potentially even less supply in the market. Several homebuilders have noted the pullback in buyer demand in recent earnings reports.

“Despite Federal Reserve actions to lower short-term interest rates, mortgage interest rates remained elevated in the fourth quarter, which impacted buyer demand as homebuyers continue to face affordability challenges,” said Ryan Marshall, CEO of PulteGroup, in its fourth-quarter earnings release.

The share of builders lowering prices dropped to 26% in February, down from 30% in January and the lowest share since May 2024. Other sales incentives also fell.

This may be because incentives are becoming less effective at attracting buyers, since high prices and high rates have reduced the pool of buyers for whom these benefits move the needle, according to the NAHB.

When a buyer is solidly priced out, no incentive helps, and with rates remaining higher, the pool of marginal buyers may be shrinking. Offering incentives to buyers who would buy regardless of price or rates is of diminishing value for builders.

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