The U.S. homebuilding industry is grappling with a series of challenges, primarily driven by high mortgage rates. Coupled with rising construction costs and a persistent shortage of available lots, the outlook for the Zacks Building Products - Home Builders sector remains strained. Builders are under increasing financial pressure due to escalating material and labor costs, limiting their ability to price homes competitively. Furthermore, the Federal Reserve's cautious approach to rate cuts underscores ongoing economic uncertainty, leading consumers to focus on essential expenditures and take a more conservative approach to their discretionary spending.

Despite these hurdles, the industry remains poised for growth. Factors such as the Fed's eventual rate cuts, a limited supply of homes for sale and strong demand for homeownership are expected to bolster the sector. Industry players are employing strategies like mortgage buydown programs and a mix of speculative building with build-to-order projects to cater to diverse buyer needs. Companies like Toll Brothers, Inc. (TOL Quick QuoteTOL - Free Report) and Dream Finders Homes, Inc. (DFH Quick QuoteDFH - Free Report) are also benefiting from initiatives focused on cost management, enhanced operating leverage, balanced business models, asset-light strategies and strategic acquisitions.

Industry Description

The Zacks Building Products - Home Builders industry comprises manufacturers of residential and commercial buildings. Some industry players are involved in providing financial services that include selling mortgages and collecting fees for title insurance agencies, as well as closing services. The industry players are involved in building single-family detached and attached home communities, townhouses, condominiums, duplexes and triplexes, master-planned luxury residential resort-style golf communities, and urban low, mid and high-rise communities. The companies are also involved in the purchase, development and sale of residential land. The companies build and own multi-family rental properties, residential real estate, and oil and gas assets.

3 Trends Shaping the Homebuilding Industry's Future

Economic Uncertainties: The U.S. homebuilding industry remains mired in challenges, with high interest rates, soaring construction costs, and a severe shortage of buildable lots stifling growth. Despite keeping rates at 4.25%-4.5%, the Federal Reserve has painted a grim picture of economic uncertainty, hinting at potential cuts later this year. Fed Chair Jerome Powell acknowledged the "remarkably high" unpredictability, while Donald Trump has aggressively pushed for deeper cuts. At the same time, economists warn that tariffs could worsen inflation, contradicting Trump’s claims that they will benefit the economy. In its March 2025 meeting, the Fed slashed its GDP growth forecast for 2025 to a dismal 1.7%, down from 2.1%, while projecting inflation to climb to 2.7%, driven in part by tariffs.

Even as mortgage rates remain between 6% and 7% as of June 12, 2025, according to Freddie Mac, the housing market is being crushed under the weight of rising material and labor costs, a dire shortage of buildable lots, and worsening financial strain on homebuilders, forcing many to slash prices and offer desperate sales incentives. The threat of further tariff hikes under the new administration only adds to the uncertainty, with inflationary pressures likely to spiral out of control. To make matters worse, the industry faces a crippling shortage of skilled labor, making it even harder to meet housing demand. With economic instability on the rise, the outlook for the housing market—and the broader economy—remains bleak.

Also, proposals to privatize government-sponsored enterprises like Fannie Mae and Freddie Mac could lead to higher mortgage rates, making it more difficult for buyers to access financing. Builders reliant on stable financing options for their customers may be adversely affected by such shifts.

Lack of Supply & Mortgage Buydown Programs: In 2024, the Federal Reserve cut the federal funds rate three times, totaling 100 bps, bringing it to 4.25%-4.50%. Anticipated rate cuts in 2025, an improving U.S. job market and growing acceptance of the new mortgage rate benchmark are expected to stabilize the housing market in the latter part of 2025.

There is a sizable shortage of new and existing homes after more than a decade of under-building compared with population growth. Low housing inventory, the desire to own a home and favorable demographic trends have been propelling growth in the new home market. Homebuilders anticipate this momentum to persist in the long run, buoyed by these factors. The economy's resilience, driven by steady job and income expansion, coupled with a surge in household formation surpassing pre-pandemic levels, underpins optimistic projections for the market's fundamental support in the coming months.

Meanwhile, the increased use of mortgage rate buydowns — temporary interest rate reductions offered along with the purchase of a new home to ease borrowers into the full mortgage payment for the beginning of a loan term — has been driving demand. Buydowns appear to be more of a marketing tool to offset the salience of high mortgage rates. The companies are also effectively managing a balance between speculative and build-to-order approaches to drive growth by maintaining a strategic mix and responding to market conditions.

Cost-Control Efforts, Focus on Entry-Level Buyers, Acquisitions & Adoption of Technology: Given the accelerated raw material prices, companies have been relying on effective cost control and focusing on making the homebuilding platform more efficient, which is resulting in higher operating leverage. Homebuilders have been controlling construction costs by designing homes efficiently and obtaining construction materials and labor at competitive prices. Some homebuilders also follow a dynamic pricing model, which enables them to set the price according to the latest market conditions. The majority of companies are focused on the growing demand for entry-level homes and addressing the need for lower-priced homes. Meanwhile, industry players have been acquiring other homebuilding companies in desirable markets, resulting in improved volumes, market share, revenues and profitability.

Meanwhile, the adoption of technology in construction presents a key opportunity for homebuilders in 2025. The integration of generative AI, robotics, and 3D printing can improve efficiency, reduce labor costs, and speed up project timelines. Builders who embrace these innovations can streamline operations, address labor shortages, and improve quality, ultimately gaining a competitive advantage in the market.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Building Products - Home Builders industry is a 17-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #225, which places it in the bottom 8% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dim near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a lower earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since March 2025, the industry’s earnings estimates for 2025 have decreased to $9.63 per share from $10.60.

Despite the industry’s blurred near-term view, we will present a few stocks that one may consider adding to their portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.

Industry Lags Sector and S&P 500

The Zacks Building Products - Home Builders industry has underperformed the S&P 500 Index and the broader Zacks Construction sector in the past year.

In the past year, the industry has plunged 19.1% compared with the broader sector’s 2% dip. The Zacks S&P 500 Composite has risen 9.2% over this period.

One-Year Price Performance

Industry's Current Valuation

On the basis of the forward 12-month price-to-earnings ratio, which is commonly used for valuing homebuilding stocks, the industry is currently trading at 9.71 compared with the S&P 500’s 21.89 and the sector’s 17.6.

Over the last five years, the industry has traded as high as 11.78X and as low as 4.19X, with a median of 9.11X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) vs. S&P 500

2 Homebuilding Stocks in Focus

We have selected two stocks from the Zacks homebuilding space that are navigating challenges with company-specific tailwinds. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dream Finders Homes: Based in Jacksonville, FL, DFH offers Dream Series (affordable homes), Designer Series (customizable move-up homes) and Platinum Series (luxury homes). It also serves 55+ active adults and luxury custom home buyers for market diversification. DFH had 258 unique active communities in 10 states and had delivered more than 40,000 homes since its inception as of March 31, 2025. A key differentiator for Dream Finders is its land-light approach, which minimizes direct land ownership and instead relies on strategic lot purchase contracts and land banking arrangements. This approach reduces financial risk, enhances asset turnover and improves return on equity. The company has also been gaining from both organic expansion into high-growth metropolitan areas and strategic acquisitions. Dream Finders' success can also be attributed to its strategic acquisitions, including the Liberty Communities deal, which allowed the company to expand into the Atlanta market, further accelerating growth in a key region.

Dream Finders — a Zacks Rank #2 (Buy) stock — has declined 15% in the past year. DFH has seen an upward estimate revision for 2025 earnings to $3.23 from $3.14 per share over the past 60 days. The Zacks Consensus Estimate for its 2025 earnings per share (EPS) is expected to register a 3.3% year-over-year decline. Dream Finders has a trailing 12-month Return on Equity (ROE) of 28.5%.

Price and Consensus: DFH

Toll Brothers: This Horsham, PA-based company is a premier luxury homebuilder. Toll Brothers continues to attract high-net-worth buyers, maintain stable pricing and manage inventory strategically to navigate market fluctuations. Toll Brothers has been navigating this challenging housing market with a strategic balance between build-to-order and spec homes, with a focus on preserving margins despite softening demand. An affluent customer base, with 24% paying all cash and low loan-to-value ratios for financed buyers, provided stability and reduced cancelations in the fiscal second quarter of 2025. The average price per home remained high, and accretive design studio upgrades continued to enhance profitability. Toll Brothers is also benefiting from disciplined cost control, positive product mix, and improved construction cycle times. Its broad geographic reach, strong backlog, and increasing community count further reinforced its growth trajectory. Importantly, a healthy balance sheet and robust cash flow allowed the company to raise its share repurchase plan to $600 million, reflecting confidence in its long-term strategy.

Toll Brothers — a Zacks Rank #3 (Hold) stock — has declined 10.6% in the past year. Toll Brothers has seen an upward estimate revision for fiscal 2025 earnings to $13.95 from $13.74 per share over the past 30 days.  The Zacks Consensus Estimate for its fiscal 2025 EPS is expected to register a 7.1% year-over-year decline. TOL carries a solid VGM Score of A, contributed by a Value and Momentum Score of A. TOL has a trailing 12-month ROE of 17.9%.

Price and Consensus: TOL