Understanding the US Housing Market in 2025: Mortgage Rates, Affordability, and Growth Trends

Key Takeaways

• Homebuilder sentiment has trended lower all of 2025, although it did increase at one point in July.
• Renter-occupied household growth exceeded owner-occupied growth at the end of the first quarter of 2025, continuing a trend spurred by affordability challenges and increased multifamily supply.
• We expect single-family starts to decline approximately 3.0% in 2025 and 0.5% in 2026 and then rebound strongly in 2027 as economic uncertainty fades and lower mortgage rates improve affordability.
• The diversity of the supplier base and goods exempt from the US-Mexico-Canada agreement help buffer the construction industry against tariff-induced cost pressures.

Homebuilder sentiment has shown notable shifts over the past year, according to The National Association of Home Builders/Wells Fargo Housing Market Index, a critical gauge of homebuilder sentiment.

Homebuilder optimism returned in early 2024—breaching the neutral level of 50 in March and April for the first time since July 2023—amid a steady sales pace and growing hopes that interest rate cuts would bolster demand for new homes.

There’s a contrast in outlooks between large public homebuilders and the broader industry sentiment, which has been below the neutral level since May 2024. The cautiously optimistic stance of large homebuilders can be attributed to their better access to financing and their ability to cope with lower net selling prices and higher capital costs.

While public homebuilders have been increasing their market share to between 35% and 40%, an estimated 60% to 65% of the market is still dominated by private builders, many of which are smaller, local entities. This division highlights the differing capacities of builders in weathering market challenges and adapting to economic fluctuations.

Renter-Occupied Household Growth Continues to Outpace Owner-Occupied Growth

The number of occupied housing units in the United States increased roughly 1% in 2024, to approximately 132 million units, which equates to 1.4 million household formations last year.

While this level of growth was a noticeable step down from 2.0 million and 1.8 million household formations in 2023 and 2022, respectively, it was still modestly above the 10-year average of 1.1 million annual household formations.

At the end of the first quarter of 2025, there were 86.1 million owner-occupied units, 0.8% higher than the year-ago quarter, and 46.2 million renter-occupied units, up 2.5% year over year.

Considering challenging homeownership affordability and more supply of multifamily units entering the market as 2025 continues, we think renter-occupied growth will continue to outpace owner-occupied growth this year as it did over the past seven quarters.

Single-Family Home Construction May Briefly Decline Between 2025 and 2026

After a disappointing spring selling season, we expect single-family starts to decline approximately 3.0% in 2025 and 0.5% in 2026 and rebound strongly in 2027 as economic uncertainty fades and lower mortgage rates improve affordability.

We still see a runway for greater headship and homeownership rates among younger Americans, especially if mortgage rates ease as we expect. Over the next 10 years, we forecast homebuilders will start roughly 1.1 million single-family homes annually, on average.

New multifamily construction activity this year has been more robust than we had anticipated. We now expect multifamily starts to increase by 6% in 2025 but fall by roughly 5% in 2026. Thereafter, we forecast that multifamily starts will grow by a low single-digit percentage annually, reaching 0.4 million units by 2029. Over the longer run, we see an undersupply of affordable housing and eventual lower interest rates as catalysts for more multifamily construction.

Our 2025 starts forecast is not far from consensus, but we have a more cautious view on 2026, mostly driven by our belief that multifamily construction will slow as the market digests an influx of new supply and homebuilders will exit 2025 with excess unsold inventory. Our above-consensus 2027 view is likely due to our more dovish interest rate outlook, which should spur more demand.

How Tariffs on Imported and Domestic Materials Are Affecting Housing Construction

Stocks with exposure to the US housing market underperformed the broader US equity market through the first half of 2025. Our homebuilder coverage has underperformed the most, as the market is worried that an elevated supply of unsold homes and softer demand for new homes will further pressure homebuilder pricing power.

Companies with meaningful tariff risk tied to imports from China have also performed poorly this year, although US trade policy remains fluid.

Tariffs on domestic and imported materials could become a significant factor in the housing construction industry, which could result in a shift in the economic landscape.

Despite these pressures, the construction industry shows signs of resilience and adaptability. A key element is how the diversity of the supplier base among leading homebuilders and retailers contributes to a flexible product strategy. For instance, while imports from China, Mexico, and Canada account for a significant portion of materials, the National Association of Homebuilders reported that only about $13 billion worth of such goods were imported in 2023. It’s worth noting that this is out of $184 billion worth of goods used to construct new single-family homes in 2023.

Furthermore, the exemption of goods compliant with the United States-Mexico-Canada Agreement (those that meet specific rules of origin requirements) from the tariffs acts as a buffer, particularly for materials like HVAC equipment manufactured in Mexico. This exemption significantly influences construction cost dynamics and eases potential financial burdens on the industry.

Is the Rate Lock-In Effect Hiding Real Estate Opportunities?

According to the Federal Housing Finance Agency, as of the first quarter of 2025, 69% of outstanding mortgages had a contract rate of 5% or less, and 24% had a rate less than 3%. Fewer homes for sale and challenging affordability have kept more first-time homebuyers out of the market. For comparison’s sake, the average 30-year fixed-rate mortgage has hovered around 7% since late 2024.

We believe the higher rate environment has dissuaded both prospective buyers and sellers, which has reduced housing turnover. An FHFA report concluded that the so-called rate lock-in effect prevented 1.72 million home sales between the second quarters of 2022 and 2024. In response, homebuilders have built more “spec homes” (also called “quick move-in homes”) and have increased sales incentives (such as mortgage rate buydowns) to attract more buyers.

For much of the past two years, this strategy paid off for homebuilders, but broader adoption of spec building across the industry has caused the inventory of unsold completed homes to almost quadruple since the spring of 2022. We expect unsold inventory will gradually shrink throughout 2025 as homebuilders continue to offer sales incentives to maintain a steady sales pace while also starting construction on fewer spec homes. Indeed, single-family housing starts have declined year over year for six consecutive months.

Affordability Remains a Key Headwind for the US Housing Market

The median sales price for existing homes increased 50% between 2019 and 2024, from $271,900 to $407,600, according to the National Association of Realtors. While price appreciation decelerated during the second half of 2022 and turned negative in spring 2023, price appreciation returned thereafter, averaging about 4% year over year since July 2023. That said, existing home price appreciation has moderated over the past few months, with the May median price up 1.3% year over year.

The S&P CoreLogic Case-Shiller U.S. National Home Price Index tracks single-family existing-home prices adjusted for constant quality, so changes in home type, size, or physical characteristics don’t skew the index. The year-over-year change in the index decelerated during much of 2022 and briefly turned negative in May 2023 (down 0.3% year over year), but the index has increased by 5% since the fall of 2023.

Homebuilders have used sales incentives, base price reductions, and smaller floor plans and lot sizes to make homes more affordable, and these actions have buoyed new-home sales. According to the National Association of Home Builders, the share of builders offering incentives (such as mortgage rate buydowns) in July was 62%, and 38% of homebuilders reported lowering base prices by 5% on average.

Top Housing Stock Picks, How to Proceed, and More Industry Coverage

As of June 24, Morningstar liked Lennar LEN (homebuilding), Fortune Brands Innovations FBIN (building products manufacturer), Wayfair W (home goods), and Sun Communities SUI (residential REIT).

We don’t think the market credits Lennar for its more capital-efficient operations. We think the market is too pessimistic about Fortune Brands’ growth and profit margin prospects. We like Weyerhaeuser’s WY diverse exposure to wood products and its timberland portfolio. Advertising and B2B opportunities should boost Wayfair’s growth prospects, and we believe Sun Communities will produce above-REIT average same-store net operating income growth over the next several years.

In the full report, we share more about valuations, picks, and coverage, as well as:

• Homebuilder data
• Consumer health and sentiment
• Repair and remodeling spending

During this period of economic uncertainty, it’s essential to remember that prospective homeowners and financial investors should still consider their long-term goals when making home purchases.