A Look Back at a Challenging Year

As we look back at 2025, we can probably all agree that things have been shaken up in Washington D.C. Whatever your take, shaking things up is better appreciated in politics than in economics. On that front, the year has been marked by falling consumer confidence with elevated food and energy prices, the DOGE cuts, the historically long government shutdown, tariff increases and a significantly stepped-up immigration enforcement. On top of all this, labor markets have softened and existing home sales remain low, stuck at levels not seen since the Great Recession.

With all this bad news we should be pleasantly surprised that permits for new single-family housing have declined only 15% since the start of the year. And that decline may turn around in 2026, given that the new home market did pretty well this past year. New home sales have been running at a slightly below 700k sales annually, which is lower than 2021 and 2022, but still represents a better pace than anytime between 2008 and 2018. While prices for those sold homes have softened, median prices remain above $400k, 30% higher than pre-pandemic, despite higher interest rates. Builders are still deep in the black, although profits have softened.

This resiliency stems from the fact that U.S. household finances remain strong, with record high disposable income (inflation-adjusted), record high net worth and relatively low debt-to-income ratios. That strength is driving demand for housing, which is running up against tight markets for existing homes. This has allowed new home markets to push through the uncertainty and high interest rates, and despite insecurity surrounding the broader economy, 2025 is shaping up nicely. Although the nation started the year with a contracting economy, the second quarter posted nearly 4% real growth and preliminary forecasts suggest the third quarter could be similarly strong once government data is released. Inflation is holding steady in the high 2% range, and the Federal Reserve is allowing interest rates to drift lower even as money supply growth increases, making credit easier to obtain.

As Beacon Economics often notes, there is a wide disparity between popular narratives about the economy and economic reality, shown in the objective data we study on a daily basis. The U.S. economy is much stronger than the prevailing narratives suggest. In fact, it is too strong—overheated by asset bubbles in the equity markets and record deficit spending by the Federal government in the midst of a full employment economy.

The overheating is evident in the ongoing expansion of the U.S. trade deficit, now at 3.5% of GDP, the widest since the Great Recession and in the record inflows of portfolio investment capital into the U.S. economy. These are clear signs of overspending and are hardly surprising given that the more than $2 trillion in borrowing this year tallies to a $16,500 subsidy for the average American household. The official savings rate for U.S. households is 5%, but when government borrowing is included, that evaporates to -5%. With that being said, the U.S. economy will continue to expand, and housing demand will keep growing until the government subsidies come to an end. But what could cause that to occur? Economists have been warning about U.S. government borrowing for decades and it’s come to nothing. This time, however, is different.

The current wave of public borrowing has been financed largely by foreign portfolio capital pouring into the nation, chasing returns from the AI- and Crypto-driven finance bubble. This linkage implies that when the bubble finally pops the United States will have to start self-funding its Federal deficit and that can only occur though a hefty increase in interest rates, which will make the $38 trillion in existing debt that much more expensive to carry. This could quickly turn into a vicious cycle where the government is forced to rapidly close deficits by raising taxes and cutting spending, causing a recession. An even more likely scenario is one where the Federal Reserve engages in additional quantitative easing (printing money), which will cause another inflationary surge.

Add it all up and the new home market should continue performing reasonably well, until it doesn’t. Builders should move forward cautiously, appreciating that the current expansion is entering its last stage of growth before reality catches up. All economic cycles weigh heavily on housing markets, and this one will be no exception. Those who are able to withstand the cycle will be the ones with high profits on the other side of the downturn.

Christopher Thornberg, PhD, is an economist and Founding Partner of Beacon Economics. Learn more at www.BeaconEcon.com.

This column is featured in our Builder and Developer December issue, Read More here