Emerging Challenges for the Housing Market

It’s certainly a challenging time to be working in residential real estate.

Whether you’re a broker or a builder, anxiety is rising from a combination of middling consumer sentiment, challenging affordability levels and constrained inventory due to sellers of existing homes unwilling to list for sale as long as many of them remain locked in sub-5% mortgage rates.

Despite pivoting to compete more effectively on price with limited existing home supply, home builders face additional headwinds from rising input costs and a labor force heavily reliant on immigrant workers who are grappling with legal and economic uncertainty, at a time when fewer native-born workers are considering careers in construction, leading to costly delays in completions. 

Still, although sales are down in the single digits year-to-date versus 2024 and continue to soften, new homes are still being sold by those builders able to embrace a combination of incentives tailored to the buyers, offering generous commissions to buyers’ agents and demonstrating the advantages of new construction through website content, on-site collateral materials, model homes pointing out options and informed sales agents able to address almost any question. At a time when building trust with potential buyers and their agents is so important, builders who clearly and consistently communicate pricing, incentives and commissions will typically do better than, for example, those who stage an Open House with no pricing guidance at all.

Nonetheless, even after the current challenges are in the rearview mirror, other long-term challenges will remain as the world adapts to the rising costs from a wilder climate, more nerve-wracking geopolitical tensions related to trade and limited resources plus countries under stress increasingly cutting back on immigration, as they figure out their next steps.

According to J. Walker Smith, a popular speaker at this year’s PCBC in Anaheim and Knowledge Lead at the global marketing and analytics giant Kantar Consulting, another longer-term headwind for builders to tackle will be lower birth rates not just in the U.S., but throughout the world except for countries in Africa. 

“Demographic shifts determine everything and household structures define household needs on a society level,” Smith explains.

When those household needs change, businesses need to change along with them – or risk being left behind. He includes three major demographic changes now having more of a domestic impact, including the slowing rate of population growth, the rise of single-person households and delayed milestones for everything from women having their first child at a later age to buying first, second and third homes much later in life. At the same time, with the 65+ age cohort growing so much faster than other groups – perhaps accounting for 20% of the overall population by 2060 – innovations in elder-focused technology and shifts in urban planning and public services will be required.

For now, the recently passed Big Beautiful Bill has some positive policies, including targeting developing more affordable housing in concert with market-rate firms. By reducing the Private Activity Bond (PAB) threshold from 50% to 25%, the bill makes it easier to finance blended projects in which developers include both affordable and market-rate units. Builders can then subsidize part of a project with tax credits while still profiting from the market-rate portion.

Also, while not noted explicitly in the bill, there is language encouraging localities to reform overly restrictive zoning in exchange for funding or project eligibility if HUD funds are tapped. Builders could then in theory take advantage of more relaxed zoning laws, density up-zoning and faster permitting in those places eager to qualify for more federal dollars. 

On the labor front, funding from the bill will support more training and hiring programs for crucial trades in framing, plumbing and electrical. Builders can then partner with local workforce agencies, trade unions or non-profits to sell the benefits of a career in the construction trades, recruit and then train new employees at subsidized rates. Still, ramping up these programs up in those areas with the greatest need for housing will take time. In the short term, unless the industry’s lobbyists can convince federal government leaders that the building industry also depends on immigrant labor showing up on time every day – as high as 45% to 50% in California, Texas and Florida – that will likely result in a lower ceiling on just how many homes can be built.

Patrick S. Duffy is a Senior Real Estate Economist for U.S. News & World Report and a Principal with MetroIntelligence.