Home construction industry executives remain gloomy, pointing to a range of current conditions characterized by buyer hesitancy, economic uncertainty, shrinking profit margins, increased use of incentives and high costs.
However, homebuilders who primarily target the edgy entry-level buyer segment face the biggest hurdles.
The National Association of Home Builders (NAHB)/Wells Fargo Housing market index The Builder Confidence Meter (HMI) remained subdued, rising one point to 39 in December. The negative score represents a year-on-year decline from 46 in December 2024.
NAHB’s report shows that 40% of builders cut prices in December, with an average reduction of 5%. Meanwhile, homebuilders’ use of sales incentives rose to 67%, the highest rate recorded in the post-COVID era.
“Market conditions remain challenging, with two-thirds of builders reporting they are offering incentives to get buyers off the fence,” NAHB Chairman Buddy Hughes said in a news release. “Meanwhile, builders are struggling with rising material and labor prices as tariffs seriously impact construction costs.”
Despite generally weak results, builder confidence rose for the third month in a row, fueled by a brighter outlook for 2026. As of December, the NAHB index is up seven points from a year-to-date low of 32 in June, August and September.
The Fed’s 25 basis point rate cut last week also provided a glimmer of good news. Current sales conditions rose one point from November to 42, and sales expectations for the next six months rose one point to 52, suggesting more home builder survey respondents share a confident view than a negative one.
“In positive signs for the market, builders report that forward sales expectations have been above the crucial breakeven level of 50 for the past three months, and the recent easing of monetary policy should help build lending conditions in early 2026,” NAHB chief economist Robert Dietz said in a press release.
Economic uncertainty is hampering homebuyer demand
Public housing executives often cite economic uncertainty and low consumer confidence as the top reasons for lagging homebuyer demand. ADPs November Employment Report concluded that the private sector lost 32,000 jobs in November, adding to some people’s concerns about the economy.
At the same time, The OECD consumer confidence index stands at 98.44 in November, lower than the long-term average of 100.
“I think consumer confidence is uncertain at best, and confidence is something that is difficult to solve with a lower price or a higher incentive. [Buyers] just need the value equation to work and to be confident in their financial circumstances to feel more secure,” PulteGroup president and CEO Ryan Marshall said during a Q2 2025 earnings call in July.
Entry-level buyers are feeling the pressure
Toll Brothers, a luxury homebuilder with an average sales price of nearly $1 million, is performing relatively well in an environment where the top 10 to 20 percent of Americans are doing very well economically.
However, younger Americans and first-time buyers are increasingly cash-strapped, leaving many builders that specialize in lower-priced segments struggling and forced to pivot.
For example, Beazer Homes and Hovnanian Enterprises announced during their most recent earnings calls that they will shift some of their focus in the coming quarters from entry-level, more affordable communities in favor of those in the upmarket segment. This is because entry-level homes often require too much incentive to sell and offer tight margins.
Geographic divides
Homebuilder sentiment was highest in the Northeast at 47, and 43 in the Midwest. The south (36) and west (34) – areas that tend to be the most active for new home development and construction – were much lower.
While the report doesn’t delve deeper into these geographic divides, the lower sentiment in the South and West can be partly attributed to an abundance of new supply, especially among first-time and first-time homebuyers, who are particularly sensitive to extended interest rates and persistently high prices for new homes. This oversupply of new homes in states like Texas and Florida has forced builders to lower prices and use more incentives to sell homes.
A recent report from Realtor.com predicted that home prices will rise 2.2% nationally by 2026, but there are geographic differences. The top ten U.S. metro areas where price growth is expected to decline the most next year are in the South and West, led by Florida with four and Northern California with three.
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