The housing market, which has been underperforming lately, is entering a traditionally better spell. The market is now entering the key spring selling season, which is considered the peak time for home sellers. Winter months normally remain subdued for home building as the weather is too wet in the south and severely chilly in the north. But Spring brings about good days for housing businesses.

Normally, the season starts in March and lasts through May-June, thanks to warmer weather after a chilly winter and buyers’ inclination to move to a new house before the next school calendar starts. But this year, homebuilders are feeling less optimistic about the housing market’s potential in Spring as they navigate concerns over tariffs, elevated mortgage rates and high housing costs.

The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) fell to 42 in February, marking a five-point drop from January and the lowest level in five months. Economists had expected a reading of 46, according to Bloomberg data. A reading below 50 indicates that more builders perceive market conditions as poor rather than good.

SPDR S&P Homebuilders ETF (XHB Quick QuoteXHB - Free Report) and iShares US Home Construction ETF (ITB Quick QuoteITB - Free Report) have lost 2.8% and 4%, respectively, so far this year (as of Feb. 24, 2025). These ETFs are off 1% and 7.4%, respectively, over the past one-year period (as of Feb. 24, 2025).

Policy Uncertainty and Cost Pressures

Builders remain hopeful of pro-development policies, particularly regulatory reform. However, policy uncertainty and cost factors have dampened bullish expectations for 2025. "While builders hold out hope for pro-development policies, particularly for regulatory reform, policy uncertainty, and cost factors created a reset for 2025 expectations in the most recent HMI," said NAHB chair Carl Harris, a custom homebuilder from Wichita, Kan, as quoted on Yahoo Finance.

Impact of Tariffs on Construction Costs

A major concern for homebuilders is the 25% tariff on all imported steel and aluminum products, set to take effect in March under President Trump's executive order. The NAHB warns that this could increase residential construction costs. "With 32% of appliances and 30% of softwood lumber coming from international trade, uncertainty over the scale and scope of tariffs has builders further concerned about costs," NAHB chief economist Robert Dietz stated.

Mortgage Rates Remain High

In addition to cost concerns, builders are grappling with elevated mortgage rates. According to Freddie Mac, the 30-year fixed mortgage rate is around 7%, further weakening housing demand. With inflation fears rising all over again, we do not expect the Fed to cut rates faster ahead. This means a high-for-longer-rate environment, which is detrimental to the homebuilding business.

Home Prices and Sales Incentives

To attract buyers, 26% of builders reduced home prices in February, down from 30% in January — the lowest share since May 2024. It may so happen that due to increasing cost structures, builders may have been unable to slash home prices heavily. Additionally, 59% of builders used sales incentives, slightly lower than 61% in January. Dietz noted that sales incentives may be losing effectiveness as higher mortgage rates reduce the pool of eligible buyers.

Deteriorating Sales Outlook

The NAHB survey revealed a significant decline in future sales expectations. The sales outlook for the next six months fell 13 points to 46, the lowest level since December 2023. Prospective buyer traffic declined three points to 29. Current sales conditions fell four points to 46.