Squeezed Homebuilders Are Bad News for the Housing Market

Builders are an important part of any plausible fix for the housing shortage in the United States — not only constructing more homes but also finding ways to improve affordability. That makes the intensifying squeeze on the industry a concern. New home construction and sales have been the one bright spot in a difficult and dysfunctional housing market for the past couple of years, but it’s no longer clear that the sector will be able to serve that role in 2025.

Homebuilders were the only game in town when much of the housing market seized up in early 2023. High mortgage rates after a period of soaring home prices made affordability the worst it had been in decades. Inventories of existing homes for sale and new listings were very low as those with pandemic-era rates held on to homes they might otherwise have sold. That enabled builders to step in and offer inventory that the resale market lacked and use the tools at their disposal to lower costs for buyers.

The best enticement was mortgage rate buydowns (where companies sacrificed some profit to give buyers a lower rate via their financing arms), but smaller floor plans and other cost-saving measures have been part of the mix as well.

This wasn’t desperation — builders were actually operating from a position of strength. Profit margins were elevated relative to pre-Covid levels in part because much of the land being developed had been acquired relatively cheap prior to the surge in values in 2021 and 2022. Selling homes at 2023 prices on land bought in 2019 was a great business. Companies also enjoyed a tailwind from the post-pandemic easing of snarled supply chains. Lumber prices fell significantly, for example, padding profit margins and offsetting softer home prices in certain markets. Fewer construction delays freed up cash for use in paying down debt and returning capital to shareholders.

More housing inventory than would otherwise exist and construction that chipped away at the two-million-home shortage in the country, better affordability than in the resale market, and solid profitability for investors — everybody was winning.