Weekend Talking Points - 'Python'

Builder confidence and housing starts plunged!? Not really. But tariff fears and rising affordability issues (mortgage rates, home prices, and insurance) are weighing on sentiment and sales.

Post-Christmas financial guilt? After strong retail sales in December 2024 (+0.7% month-over-month), retail sales fell 0.9% MoM in January 2025. Is the American consumer finally recognizing the unsustainability of rising credit card (and other) debts?

So many fires, it’s just not FAIR. California’s state-owned ‘insurer of last resort’ just got a $1 billion cash infusion (a rather nice way to say ‘bail out’) that should enable it to cover the mammoth claims from the Los Angeles fires.

TP: The price of home insurance has gone from niche issue to national concern, with many homeowners choosing to go “naked” (no insurance), and Fed Chair Jerome Powell warning that some areas (you can guess where) will likely become uninsurable in the future.

No property taxes in Florida? Governor Ron DeSantis has floated the idea of abolishing property taxes in the Sunshine State. Unlike many states, Florida gets the majority of its revenues (~80%) from sales and excise taxes. So, in theory, Florida’s state budget could handle it — but what about local/municipal budgets?

TP: Florida is already considered a ‘regressive’ tax state. That means that lower-income people pay a higher % of their income in taxes than wealthier people (because they pay sales tax on so much of what they buy).

Big drop in builder confidence? The National Association of Homebuilders’ confidence index dropped 5 points in February 2025 to 42. Builders were unsettled by Trump’s planned 25% blanket tariffs on Mexico and especially Canada (we get a ton of lumber from our neighbor to the north). Remember, the NAHB has been lobbying Congress and the President to LOWER tariffs on Canadian soft wood.

TP: People who responded BEFORE the tariffs got delayed (1 month, indefinitely, who knows?) had an aggregate 38 index score. People who responded AFTER the deals with Trudeau & Sheinbaum had an aggregate 44 index score. So the real drop in builder confidence wasn’t that dramatic.

Off-MLS listings sell for less? According to Zillow analysis, homes that WEREN’T listed on their local MLS sold for $5,000 less on average, and as much as $30,000 less in certain markets. Why? “Private” or “exclusive” listings certainly sound cool, but they necessarily reduce the audience of potential buyers seeing your property.

TP: Zillow has a clear conflict of interest here. Homes that don’t go on the MLS don’t appear on Zillow, which means a smaller number of homes for the property portal to monetize (through advertising, lead gen etc.) That said, unless you’re J. Lo, and value privacy above all else, I believe that you’re generally better off maximizing publicity with an on-MLS listing.

Housing starts dropped in January, but…this is really not a big deal. New home starts fell 10% month-over-month in January 2025 (to 1.37 million units SAAR), but that was after a 16% MoM increase in December 2024. Completions (1.65 million units SAAR) continue to outpace new permits (1.48 million units SAAR) as the wave of starts from 2021–2022 get finished.

TP: In 2024, 14.4% of the total homes sold were new homes. That compares with 9–10% pre-pandemic. But with the inventory of existing homes up 25% YoY in 2024, we’re likely to see the % importance of new home sales drop, especially if mortgage rates fall.

Are cash buyers out of cash? Nah! According to Redfin analysis, only (only?!) 32.6% of homes sold in 2024 were all-cash transactions, the lowest % figure in 3 years. OK, but nearly one-third is still an incredible number! That means that 1.32 million homes (out of 4.06 million transactions nationwide) were purchased with fat stacks of cash. Oh, to be a cashed-up Boomer or Bitcoin billionaire!

Counting the Fed minutes. The notes from the Fed’s last meeting (where they hit ‘pause’ for the first time during this loosening cycle) were rather dull. The key message: with close to full employment, we can afford to wait to see if inflation resumes its downward march. They also discussed a likely mid-2025 end to “quantitative tightening”, which should be good news for bond yields and mortgage rates.

NAR’s new forecasts. Lawrence Yun, NAR’s Chief Economist said that “things are looking up” in 2025 and unveiled updated forecasts:

• 30-year mortgage rates to be in the 6% range for most of 2025 & 2026
• 7–12% growth in existing home sales in 2025 (from 4.06m units in 2024 to ~4.5 million in 2025), and 2% home price growth
• 10–15% growth in existing home sales in 2026 (from ~4.5 million in 2025 to ~5.0 million in 2025), and 2% home price growth

New Home Construction: The Pig in the Python

Whenever I look at the latest housing starts & permits data from the Census Bureau, I always think about the Pig in the Python. Childish analogy or brilliant data visualization? You decide. In any case, let me explain:

• Every month the construction industry Python is swallowing new food (getting new permits = Pigs)
• The Pig traveling through the Python’s digestive tract is like the home going through the various stages of construction (Permits → Starts → Construction → Completion).
• We know how long “digestion” takes (e.g. 9 months from Start → Completion for single family homes). By the way, these timelines have really been lengthening over the last few years, as the graphs below show.
• The “bulge” in the Python tells you which stage of construction the bulk of the new home inventory is, and therefore, how long will take before that becomes new, finished supply.
• Remember: All those figures below are SAAR (Seasonally Adjusted Annual Rates). We did not complete 1.65 million new homes in January. Instead, we were completing homes in January at a pace that (seasonality taken into account) would be consistent with 1.65 million completions over the next 12 months

So what is the Pig in the Python telling us today? The big “bulge” in Starts that we saw in 2021 and 2022 has now worked its way to Completion. Also, with a much lower number of homes currently under Construction or just Starting, Completions will likely be falling over the next year (since it will take 1–2 years before newly Permitted homes get Completed).

What are the implications of this? Roughly 40% of the Completions happening today are multifamily (2 or more units in the building) and 48% of all Completions are happening in the South region. So I think that this tells us that rental rates and home prices will continue to be under near-term pressure in certain markets in FL, TX, TN etc. where the inventory of existing homes is already higher than pre-pandemic AND there’s a lot of new homes being completed.

But things could change in 2026. Not a lot of MF units have been permitted in the last year. So assuming that the takeup rate for new units stays high, we could see rental rates starting to increase again (nationwide) around a year from now.

Note: It’s taking longer and longer for the Python to digest the Pig

More Fun Facts on New Home Construction

During the pandemic, the inventory of existing homes for sale plunged, providing an opportunity for the construction industry to fill the demand gap with new homes. Today, roughly 27% of the total inventory of homes for sale are new homes. That’s way up from 10–15% pre-pandemic.

In addition, homebuilders could build smaller homes and offer financial incentives (interest rate buydowns etc.) that sellers of existing homes couldn’t match. These proved very advantageous when mortgage rates rose above 7%. As a result, new home sales went from 9–10% of total homes sold to around 14% of homes sold in 2023 and 2024.

But…that still means that 73% of the for sale inventory is from existing homes. And with existing home inventory up ~25% year-over-year in 2024, I’d expect to see these figures beginning to revert to the mean.

Mortgage Market

Average 30-year mortgage rates have been hovering around 7% for the last few weeks. On the one hand, the Fed’s “pause” and the subsequent CPI figure had the market pushing out rate cut expectations. On the other hand, a mid-2025 end to QT would be bullish for bonds (sending yields lower).

Here’s what the Fed Funds Rate futures market is currently pricing in for rate cuts. Note that the current Fed Funds Rate policy range is 4.25–4.50%.

• March 19 FOMC Meeting: 98% probability that the policy rate will remain at 4.25–4.50% (same as last week). In other words, that the Fed will stay on pause.
• May 7 FOMC Meeting: 89% probability that the policy rate will remain at 4.25–4.50% (same as last week). 11% probability of a 25 bps cut (25 bps = 0.25% = a quarter percentage point) to 4.00–4.25%.
• June 18 FOMC Meeting: 53% probability that the policy rate will remain at 4.25–4.50% (was 66% last week). 43% probability that the policy rate will be 25 bps below current (a rate cut on either May 7 or June 18). 4% probability that rates will be 50 bps below current.

They Said It

“While builders hold out hope for pro-development policies, particularly for regulatory reform, policy uncertainty and cost factors created a reset for 2025 expectations in the most recent [builder confidence index]. Uncertainty on the tariff front helped push builders’ expectations for future sales volume down to the lowest level since December 2023.” — Carl Harris, NAHB’s Chairman

“All is expected to change for the better this year. The momentum of higher home sales was already noted in the final months of 2024. A steady boost in inventory, starting in the summer months, has brought more options and excitement to those looking to buy. Incomes have been rising a shade above home price appreciation. The Federal Reserve has been cutting its short-term bank lending rate, even though mortgage rates have not followed the downward path — at least not yet. And the election and transition of power are behind us.” — Lawrence Yun, NAR’s Chief Economist