Interview
K-shaped housing: regional and segment divergence emerges from inventory reset
- Active listings in the Northeast are projected to remain down over 50% from 2019 levels, creating significant difficulty for buyers, while listings in the Southeast and Texas are expected to stay above 2019 levels due to new single-family and multifamily deliveries.
- Domestic migration to the South is anticipated to continue at a significantly slower rate than during the COVID era, and international immigration is expected to remain subdued, resulting in neutral rather than positive population growth for the region.
- Job growth in Southern cities, specifically the Dallas area, is forecast to be substantially lower than the nearly 100,000 jobs added in 2023, acting as a headwind for these markets.
- Housing starts are expected to remain down by double digits in the second half of 2025, with multifamily starts slowing dramatically to add less supply to the market.
- Builders plan to reduce spec inventory by selling more homes than they start, a strategy intended to set the market up for improvement in the second half of the year.
- The "Road to Housing Act" and related executive orders are predicted to have only a low single-digit percent impact, potentially less, on housing starts due to high thresholds for institutional investor bans.
- Federal-level policy changes are expected to remain minimal regarding home building, as municipal approval expediting is a very slow process and federal intervention in local land approval is limited.
- Development of federal lands is expected to yield very little impact unless situated in high-demand areas, with only minimal potential noted in Florida.
- A "lock-in effect" is expected to keep active listings down as homeowners with fixed-rate mortgages are reluctant to trade into higher prevailing rates, potentially benefiting builders as the primary alternative.
- Housing heat map scores are expected to serve as a slight leading indicator for forward return on equity (ROE) outcomes, given that builders make underwriting decisions today for homes delivered several years in the future.
- Builder stocks are expected to trade with significant volatility driven by mortgage rate expectations rather than underlying fundamentals, as illustrated by 2023 performance despite rising rates.
- Strong job growth is considered a more positive indicator for home builders than lower mortgage rates alone.
- The repair and remodel sector is expected to show resilience in high-end projects driven by home equity, while kitchen and bath remodels and flooring are expected to suffer from softness due to their deferrable nature.
- The labor pool for skilled trades capable of high-end remodeling is expected to be very tight and likely shrinking annually, contributing to rising project costs.
- Millennials are expected to continue performing fewer DIY projects compared to earlier generations, keeping the professional business segment stronger than the do-it-yourself market.
- The high-end move-up home builder segment is expected to offer a better ROE outlook than the entry-level segment, attributed to lower rate sensitivity, favorable demographics, and less land cost inflation.
- Non-discretionary building product categories like roofing are expected to outperform or hold steady because demand is driven by the installed base rather than new construction or discretionary spending.
- Material conversion trends shifting from wood to composite are expected to allow volume growth even if the broader market remains sluggish.
- The roofing category is expected to receive a modest tailwind if weather patterns become more normal in the current year or subsequent years, following depressed activity from the lack of hurricanes in 2025.
- High-end second home destinations are expected to continue performing well due to a strong correlation between cash-buyer markets and recent stock market gains.
- The analyst team anticipates a much better backdrop for builder stocks driven by improved job growth, reduced market supply, and the normalization of cost inflation.