Homebuilding executives are entering the new year with a bleak outlook on the housing market as buyer hesitancy, shaky consumer confidence, shrinking profit margins and increased incentives weigh on the sector.
The National Association of Home Builders (NAHB)/Wells Fargo The builder confidence indicator for the housing market index (HMI) remained negative at 37, down two points from December and down 10 points year-on-year.
NAHB’s research shows that 65% of builders indicated that they use sales incentives, the 10th month in a row with a share of more than 60%. The average price drop in new home sales in January reached 6%, up from 5% in December, and 40% of builders reported price cuts, unchanged from last month.
Recent census data shows that new home sales prices averaged $392,300 in October 2025, down 8.0% year over year. While new home sales rose 18.7% that month from 12 months earlier, prices fell significantly as builders resorted to price cuts, incentives and mortgage buying.
This strategy, which became a tactical necessity to sell an unusually high level of started and completed inventory, has eroded homebuilders’ profit margins. Below are examples of year-over-year declines in gross profit margin, taken from the latest profit reports from government builders.
- Lennar: 17.0%, lower than 22.1%.
- Smith Douglas Homes: 21.0%, lower than 26.5%.
- Counters: 26.2%, down from 28.8%.
- DR Horton: 21.66%, down from 23.6%.
- KB Home: 17.0%, lower than 20.9%.
Geographically, builder confidence remains highest in the Northeast (45) and Midwest (43), and lowest in the South (35) and West (35). The lower confidence in the South and West is related to an oversupply of new homes in those regions, which has put downward pressure on prices. The largest metro areas that saw the biggest declines in home prices last year were all in the South, led by Austin, Tampa, Miami, Orlando and Dallas.
In a statement, NAHB Chairman Buddy Hughes said the luxury home market is doing well, but the first-time and first-time homebuyer segment is struggling.
“Buyers are concerned about high home prices and mortgage rates, with down payments particularly challenging given high price-to-income ratios,” he said.
“The HMI’s forward sales component fell below 50 for the first time since September, indicating that builders continue to face several issues, including labor and lot shortages, as well as increased regulatory and material costs,” NAHB chief economist Robert Dietz added.
However, there is a silver lining. The average 30-year mortgage rate now stands at 6.04% as of January 14, the lowest point since October 2024. Yet economic uncertainty and shaky consumer confidence continue to dampen the outlook for the housing market.
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