The new home construction market is navigating a complex landscape of challenges and opportunities. Industry observers describe a dynamic market with builders and homebuyers alike adapting to shifting economic conditions and evolving preferences.
“Builders have had challenges such as higher prices, shortages of lumber, lots and labor,” observed Tracy Wyrick, Engineered Floors’ vice president sales builder and multi-family. “Higher interest rates and overall housing affordability held back demand, so the industry had moderate growth in 2024.”
The single-family housing market faced headwinds in the first half of 2024 as persistent inflation and elevated interest rates constrained housing supply and demand. “However, as inflation began to ease and mortgage rates started to moderate in the second half of the year, builder sentiment started to improve, although it remains below breakeven levels,” stated Robert Dietz, chief economist and senior vice president, economics and housing policy, National Association of Home Builders (NAHB).
In early December, Freddie Mac reported the fixed rate for a 30-year mortgage decreased to 6.7%, the lowest level in more than a month. Forecasts suggest mortgage rates will continue declining throughout the first half of 2025. “This decline is expected to enhance affordability, stimulating homebuyer demand and encouraging increased activity from the builders,” said Travis Cramer, senior director of product management at Tarkett Home. “As a result of this, we expect to see increased growth in the residential flooring market.”
Flooring is closely tied to the housing market, with its fortunes rising and falling in tandem with broader real estate trends. One closely watched economic indicator is single-family housing starts. In November 2024, the latest month for which figures are available, housing starts unexpectedly declined 1.8% to a seasonally adjusted annualized rate of 1.289 million units. Starts in the prior month, October, fell to a seasonally adjusted annual rate of 970,000, a nearly 7% decline from the revised September figure and flat compared to October 2023, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.
Despite the headwinds, however, the single-family segment of the market held its own. “Successful builders thought outside the box and developed creative ways to build, promote and sell new homes,” said Dan Butterfield, vice president of sales, Builder Multi-Family, Dal-Tile.
Dodge Construction Network projects single-family housing starts will grow at a slower pace in 2025. “This will result in the continuation of a new construction market that tilts toward high-end homes, further perpetuating affordability issues and curtailing new home purchases by younger buyers,” said Sarah Martin, associate director of forecasting.
Housing affordability
Despite stubborn inflation, consumers appear to be acclimating to higher mortgage rates and home prices. Case in point: In December, a record-high share of consumers indicated they expect mortgage rates to decline over the next 12 months, while fewer respondents said they expect home prices to rise, according to the Fannie Mae Home Purchase Sentiment Index. While only 23% said it’s a “good time to buy a home,” this sentiment is notably higher than last November’s 14%.
“Over the past year, we have seen a significant improvement in general consumer sentiment toward the housing market, largely driven by increased optimism that mortgage rates will fall and improved perceptions of both home-buying and home-selling conditions,” said Mark Palim, Fannie Mae’s SVP and chief economist.
Mortgage rates are expected to remain high, averaging 6.3% across 2025, according to the Realtor.com 2025 housing forecast. That’s down slightly from the 6.7% average expected throughout 2024, but still well above the 4% historical average recorded from 2013 to 2019. The situation has constrained home sales as potential buyers were hesitant to take on high-interest loans.
“Many homebuyers are remaining in their current homes instead of investing in a new home,” said Scott Baker, Shaw Industries’ vice president of single family. “And many potential first-time homebuyers are struggling to meet the financial demands of current mortgage payments.”
Housing affordability has a trickle-down effect for providers of interior decorating products such as flooring, as higher interest rates impact not only when consumers buy but also the selection of materials. “With fluctuating consumer confidence, we are seeing a growing demand for cost-effective flooring products that don’t compromise on style,” Tarkett Home’s Cramer said. “Builders are bringing in options that offer the appearance of luxury flooring materials while maintaining affordability, durability and easy maintenance.”
Other factors and economic indicators are worth watching. For example, Fed moves to recalibrate monetary policy and balance risks between inflation and employment. Additionally, policy changes as a result of the 2024 presidential election could also alter the housing economic outlook.
“While a shift in policy could potentially boost economic growth, it may also lead to a tighter labor market, larger government deficits and higher tariffs,” said Fan-Yu Kuo, senior economist at NAHB. “These factors could increase inflationary pressures, suggesting a more gradual easing cycle with a slightly higher terminal federal funds rate compared to earlier forecasts.”
Indeed, factors such as immigration, government deficits and regulatory costs pose significant upside and downside risks to housing forecasts. “Regulatory burdens can account for approximately 25% of a single-family home’s final sale price,” NAHB’s Dietz pointed out. “Reducing these factors is important for the health of the home building industry and improving housing affordability.”
Ongoing builder challenges
Economic headwinds are just one of several issues builders are grappling with as they enter the new year. For instance, labor shortages, high building material prices and limited lot availability continue to be top concerns.
“Service models need to support this material and labor demand,” Dal-Tile’s Butterfield said. “Flooring contractors and suppliers need to continue to work in harmony toward helping builders achieve their goals.”
The increase in U.S. tariffs on Canadian lumber last year contributed to higher lumber prices, observers noted, and if additional tariffs are implemented, “they could further drive up costs of building materials as nearly 10% of supplies are imported,” NAHB’s Kuo said. “These higher costs will add inflationary pressure and further exacerbate housing affordability.”
On the labor front, many builders report difficulty in finding qualified tradespeople, such as framers, electricians and plumbers. More aggressive border control policies and stepped- up illegal immigration enforcement could further impact the labor pool. “Proposed deportations of illegal immigrants will further tighten labor markets, particularly in border states,” NAHB’s Dietz said. “This ongoing labor shortage is causing construction delays and increasing costs.”
By staying agile and responsive to these challenges, the flooring industry can continue to thrive and meet the needs of homebuyers in an ever-changing market. “Despite the economic headwinds, throughout the year, builders have continued to seek cost effective and durable flooring options,” Tarkett Home’s Cramer added.
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