The U.S. homebuilding industry faces a challenging backdrop in 2025 as elevated mortgage rates and cautious consumer sentiment continue to weigh on demand, compelling builders to offer higher incentives to sustain sales. Rising construction costs, labor shortages and limited lot availability add to the pressures, restricting pricing flexibility and profitability for the Zacks Building Products - Home Builders industry. Meanwhile, the Federal Reserve’s measured stance on rate cuts signals persistent macroeconomic uncertainty, keeping consumers focused on essentials and delaying discretionary home purchases.

Yet, industry fundamentals suggest resilience. Tight housing supply, eventual Fed easing and a steady underlying demand for homeownership should provide support to the industry over the long term. Builders are increasingly adapting by using mortgage buydown programs and balancing speculative and build-to-order activity to serve varied buyer segments. Leading players like D.R. Horton (DHI Quick QuoteDHI - Free Report) and Toll Brothers (TOL Quick QuoteTOL - Free Report) are further benefiting from disciplined cost controls, operating leverage, diversified models, asset-light strategies and selective acquisitions, positioning them to navigate near-term headwinds while capturing long-term growth opportunities.

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 June 2025 meeting, the Fed slashed its GDP growth forecast for 2025 to a dismal 1.4%, down from 1.7%, while projecting inflation to climb to 3%, driven in part by tariffs.

Even as mortgage rates remain in the mid-to-upper 6% range so far this year, 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 and growing acceptance of the new mortgage rate benchmark are expected to stabilize the housing market going forward.

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.

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 16-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #229, which places it in the bottom 7% 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 10.1% against the broader sector’s 5.4% rise. The Zacks S&P 500 Composite has risen 19.9% 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 13.29 compared with the S&P 500’s 22.88 and the sector’s 20.36.

Over the last five years, the industry has traded as high as 13.29X 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

Industry’s P/E Ratio (Forward 12-Month) vs. Sector

2 Homebuilding Stocks in Focus

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

D.R. Horton: Based in Arlington, TX, D.R. Horton’s growth is being driven by its unmatched scale, disciplined execution and strong positioning in the affordability segment. The company continues to capture resilient demand from first-time buyers—who represented 64% of closings in the third quarter of fiscal 2025—through smaller floor plans, attractive financing options like FHA rate buy-downs and the strategic use of incentives to sustain traffic without broadly cutting prices. Its integration with Forestar and reliance on third-party developed lots enhance capital efficiency, while improved construction cycle times and tighter inventory management accelerate turnover and strengthen returns. Diversified contributions from rental operations and mortgage services provide incremental earnings stability, while a robust balance sheet, consistent cash generation and aggressive share repurchases amplify shareholder value. Together, these factors enable D.R. Horton to maintain industry leadership and deliver steady growth despite affordability pressures and broader housing market volatility.

D.R. Horton— a Zacks Rank #3 (Hold) stock — has lost 1.8% in the past year but jumped 45% in the past three months. DHI stock has seen an upward estimate revision for fiscal 2025 earnings to $11.76 from $11.42 per share over the past 60 days. The Zacks Consensus Estimate for its fiscal 2025 earnings per share (EPS) is expected to register a 18% year-over-year decline but 2.5% growth for fiscal 2026. Meanwhile, this company surpassed earnings estimates in two of the trailing four quarters and missed on the other two occasions, the average being 3.7%. DHI has a trailing 12-month Return on Equity (ROE) of 15.7%.

Price and Consensus: DHI

Toll Brothers: This Horsham, PA-based company is a premier luxury homebuilder. Toll Brothers’ growth is being propelled by its strong positioning in the luxury housing market, where affluent buyers continue to demonstrate resilience with high cash purchases and premium upgrades, pushing average selling prices above $1 million. The company’s balanced approach of maintaining a 50-50 mix between spec and build-to-order homes is allowing faster cycle times, customization flexibility, and margin stability near 27%. Operational efficiency, disciplined cost control, and technology investments are further boosting profitability, while an expanding community count and a well-structured land pipeline provide visibility for future growth. Supported by a solid balance sheet, robust cash flows, and consistent capital returns to shareholders, Toll Brothers remains well-positioned to capitalize on pent-up housing demand, favorable demographics and easing interest rates.

Toll Brothers — a Zacks Rank #3 (Hold) stock — has gained 5.7% in the past year but has jumped 32.2% in the past three months. Meanwhile, this company surpassed earnings estimates in three of the trailing four quarters and missed on one occasion, the average being 5.5%. TOL carries a Value Score of B. TOL has a trailing 12-month ROE of 17.4%.

Price and Consensus: TOL