NAHB: Policy Uncertainty a Rising Risk Factor
- saggioak
- Mar 10
- 3 min read
March 5, 2025
The Trump 2.0 administration is undertaking a dramatic set of economic policy changes. In just a few weeks, the president has proposed and/or enacted an aggressive slimming of government staffing, increased tariffs and trade barriers, supported the extension of existing tax cuts, proposed a broad deregulation effort, reversed immigration policy, and outlined a reworking of U.S. foreign policy that is more independent from the long-standing post-World War II system.
Estimating the net positive/negative effects of this evolving new set of economic rules is challenging. Although reduced regulatory costs and an extension of the 2017 tax reform are positive developments for home builders, higher tariffs and mass deportations are risk factors for the industry and the general inflation outlook. Anecdotally, I am hearing from builders that the cost impacts of tariffs on the average price of a new home could range between $7,500 to $10,000.
In fact, the pace of change may be too much for markets to absorb. While surveys suggest broad support among businesses for much of the Trump administration's policies, investors have reduced holdings of stocks and equities and, instead, have purchased U.S. Treasury bonds as a flight to quality in response to higher risk. For example, some investors hoped that tariff threats on Canada and Mexico were a negotiating stance. Instead, such 25% tariffs are now becoming North American trade policy.
As a result of these financial risks, the 10-year Treasury rate has fallen from 4.8% in mid-January to below 4.2%. This has moved mortgage rates slightly lower, even as the Fed has been on pause. Lower long-term interest rates are a net positive for the industry, even though the decline is a result of reduced growth expectations for 2025.
Housing is off to a slow start for the year. New home sales decreased in January to a three-month low, as housing affordability continues to sideline potential home buyers. Sales of newly built, single-family homes in January decreased 10.5% to a 657,000 seasonally adjusted annual rate. New single-family home inventory in January continued to rise to a level of 495,000, up 7.4% compared to a year earlier. This represents a 9-month supply at the current building pace. Completed ready-to-occupy inventory was at a level of 118,000, up 39% compared to a year ago.
While new home inventory levels have increased to measures that would, in normal market conditions, suggest a slowdown for single-family home building, resale inventory remains lean. Total existing home sales fell 4.9% to a seasonally adjusted annual rate of 4.08 million in January. However, sales were 2.0% higher than a year ago, marking the fourth consecutive month of annual increases. Although existing home inventory is up 16.8% from a year ago, the current 3.5-month supply remains low compared to balanced market conditions (4.5- to 6-month supply) and illustrates the long-run need for more home construction.
The future pace of new and existing home sales will depend on macro factors, including labor market conditions and economic growth. Tariffs (external sales taxes) are a significant headwind, with short-term increases for prices of key building materials like softwood lumber.
Moreover, there is a certain amount of "complacency" risk among markets. Change and reform can be positive factors, but markets do not like uncertainty. And the unwinding of established economic and financial systems can produce wide-ranging economic consequences, particularly if the potential benefits of such changes are in the future while the costs are here today.
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