Homebuilder Sentiment Stayed Negative for 20th Consecutive Month

Min 1: New Home Prices Down 10% While Existing Homes Keep Rising

Here's the market paradox that explains everything: existing home prices kept climbing since 2022, but median new home prices dropped more than 10% according to NAHB Chief Economist Robert Dietz. That's builders absorbing the pain of affordability through incentives instead of sellers budging on resale pricing. Average price cuts hit 5% in December, but the real action is in non-price incentives—67% of builders used them, the highest percentage in the post-Covid period. A builder who acquired an entitled land bank in Phoenix during 2024 at $40,000 per lot now constructs homes at $180,000 all-in cost, sells at $325,000 after 5% price cuts plus $15,000 in buyer incentives, and still generates $130,000 gross margin per home—a 40% gross margin delivering 22% ROE with rapid inventory turns that beat sitting on spec homes for nine months.

Min 2: Tariffs Pushed Materials Up 8% to 12%

Banks tightened credit on construction loans just as materials pricing increased 8% to 12% depending on category, according to NAHB data. Trade policy uncertainty compounds supply chain challenges while labor shortages keep wages elevated despite the construction slowdown. Public homebuilders with national purchasing power maintain margins while regional builders get squeezed. DR Horton, Lennar, and PulteGroup negotiate better pricing, offer competitive mortgage rates through captive lenders, and spread fixed overhead across larger volumes—creating a 200 to 300 basis point margin advantage over local builders forced to pass full cost increases to buyers already facing affordability constraints.

Min 3: Future Sales Expectations Above 50 for Three Straight Months

The one bright spot in the data: future sales expectations stayed above 50 for three straight months as builders anticipate Fed rate cuts helping loan conditions at the start of 2026. Bloomberg Intelligence analyst Drew Reading expects home closings among publicly traded builders to rise modestly next year after an anticipated 4% drop in 2025. Compass Chief Economist Mike Simonsen calls 2026 the next era for housing after four years of frozen sales as sufficient inventory and rising incomes finally make homes feel affordable again. Builders who held $200 million in cash through 2024 and early 2025 now deploy capital acquiring distressed land positions from overleveraged competitors—buying entitled lots at 40 to 50 cents on the dollar creates immediate margin advantage that compounds as the market normalizes.

Min 4: Midwest Improves While Sun Belt Keeps Sliding

The regional split couldn't be clearer. Builder sentiment improved most in the Midwest and picked up in the West, but sentiment in the South—the biggest homebuilding region—slipped. Midwest markets avoided the worst pandemic excess while Sun Belt markets face years of supply absorption after overbuilding into demographic assumptions that didn't materialize. Markets like Indianapolis, Kansas City, and Cincinnati see steady builder activity as affordability attracts buyers priced out of coastal markets. A builder focused on these Midwest markets constructs 300 homes annually at $185,000 average cost, sells at $310,000, and generates $7.5 million in earnings on $93 million revenue at 20% net margins while competitors in oversupplied Sun Belt markets struggle with profitability at higher volumes.

Min 5: Housing Legislation Passed Committee 50-1

The House Financial Services Committee passed the Housing for 21st Century Act on a 50-1 vote in mid-December—rare bipartisan support for streamlining development. The bill increases the public welfare investment cap from 15% to 20%, expanding private capital availability for affordable housing while maximizing the impact of the historic low-income housing tax credit expansion enacted earlier in the year. The regulatory improvements flow through to builders as streamlined approvals that reduce timelines from 18 months to 12 months—the six-month reduction saves $2,500 per lot in holding costs plus accelerates revenue by half a year, generating savings exceeding $1.25 million across a 500-lot subdivision while improving returns through faster capital recycling.

The Takeaway

Homebuilder sentiment stayed below 50 for a twentieth consecutive month as 40% cut prices averaging 5% while 67% offer incentives—the highest in the post-Covid period—pushing median new home prices down 10% from peak despite tariffs increasing materials 8% to 12%. Future sales expectations stayed above 50 for three months signaling recovery as Fed easing helps loan conditions, with closings projected to rise modestly in 2026 after a 4% decline in 2025. Midwest sentiment improved while the South slipped, creating geographic opportunities as Indianapolis, Kansas City, and Cincinnati avoid oversupply with entry-level homes at $275,000 to $325,000 generating 20% net margins. The House passed housing legislation 50-1 that reduces entitlement timelines by six months, saving $2,500 per lot and positioning builders maintaining balance sheets and Midwest focus for outsized returns as the market normalizes through 2026.