Tariff Fears and Mortgage Rates Hurt Builder Sentiment as Single-Family Home Construction Slows

Single-family housing starts slowed dramatically in January, as builders kicked off the new year under the cloud of higher mortgage rates and potential new tariffs that could raise construction costs.

Starts on single-family units, which account for the vast majority of all homebuilding, dropped 8.4% from December to a seasonally adjusted annual rate of 993,000, the U.S. Census Bureau reported Wednesday. The January figure was down 1.8% from a year earlier.

Total housing starts, including more volatile multifamily construction, were at 1,366,000 annualized last month—down 9.8% from December and 0.7% less than a year earlier.

“Builders are exercising caution in January 2025, responding to the overall slow home sales market of 2024, in which fewer existing homes were sold than in any year since 1996,” says Realtor.com® Senior Economist Joel Berner.

A string of historic winter storms in January likely contributed to the sharp slowdown in home construction last month, although the figures are seasonally adjusted and also down from their level a year earlier.

Homebuilder sentiment dropped to a five-month low in February despite a national housing shortage, as mortgage rates hovered near 7% and builders voiced fears that the Trump administration’s tariff policies could raise the cost of key materials.

The National Association of Home Builders/Wells Fargo Housing Market Index plunged to its lowest level since September in the latest reading on Tuesday, erasing the gains it made after President Donald Trump‘s election win in November.

Trump slapped a 10% additional tariff on Chinese goods and threatened 25% levies on goods from Canada and Mexico, the respective sources of most of the lumber and drywall gypsum used in U.S. home construction.

“As mirrored in our latest builder survey, high construction costs, elevated mortgage rates and challenging housing affordability conditions are causing builders to approach the market with caution,” says NAHB Chairman Carl Harris. “The uncertain policy environment in terms of a better regulatory climate and impending tariffs offers both upside and downside risks in the near-term.”

Permits remain flat while completions rise

Permits for new single-family homes—a leading indicator of future construction—were virtually unchanged in January from the prior month, at an annualized rate of 996,000.

However, completions rose as homes that were in the construction pipeline were wrapped up. Single-family completions jumped 7.1% from December to 982,000 annualized.

“Builders are hustling to wrap up their projects and get new homes onto the market in advance of the start of the spring buying season,” says Berner.

“The growing gap between completions and starts suggests some pessimism about building and selling new homes in the near future, but also some optimism about the current state of the market despite high mortgage rates,” he adds.

Mortgage rates have remained close to 7% since the start of the year and are expected to remain elevated for the foreseeable future, after the Federal Reserve paused cuts to its short-term policy rate.

For homebuilders, higher interest rates deliver a double whammy, raising borrowing costs to finance construction as well as making homes relatively more expensive for homebuyers.

The full impact of higher rates will become clearer in a few weeks, as the spring homebuying season begins in earnest.

“The uptick in completions is good news for buyers, who continue to see more options available to them both overall and among newly built homes,” says Berner. “If builders continue to prioritize smaller, less expensive projects, we will see affordability in the housing market improve.”