The flagging economy is hurting the housing market

Where the economy goes, the housing market goes. Its current destination? Unclear.

That’s the takeaway from economists, real estate agents, buyers, and builders trying to make sense of a faltering economy. Slower growth — the economy shrank at the beginning of 2025 — means interest and mortgage rates will probably stay high for the foreseeable future. Stock market swings and flagging consumer confidence are pushing buyers out of the market. President Donald Trump’s trade war is adding thousands to construction costs for new homes and remodels.

“Markets work because people have price knowledge, and they have those prices to make decisions,” said Robert Dietz, chief economist at the National Association of Home Builders. But so much uncertainty, Dietz said, is creating a “wait-and-see economy.”

A house is often a household’s single largest investment or asset, and buying or selling can be one of life’s biggest financial decisions. Entire budgets are structured around monthly mortgage payments or rent. So what happens in the housing market reverberates through the entire economy, and vice versa. Experts look to the number of homes for sale or list prices as litmus tests for how the broader economy is faring. And conversely, housing affordability and availability are among the most direct ways people feel the economy in their daily lives. Keeping a close read on the market is especially key when a range of economic indicators are flashing warnings, but without clear answers as to what they mean.

There are some encouraging signs. Sales of new homes increased more than 7% in March, the highest jump since September, with particular gains in the South and Midwest. A brief drop in mortgage rates last month — spurred partly by a drop in the 10-year Treasury yield — fueled a flurry of applications for new loans and refinances, as buyers and owners took advantage of the lowest rates in months.

But something gloomier is taking hold, too. Existing-home sales in March saw their biggest monthly drop in more than two years, falling almost 6% during what is normally the start of the spring selling season. Construction spending fell broadly in March. And housing starts — marking when builders break ground — fell more than 11%, according to government data, with borrowing costs and a tight labor market slowing new construction.

Trump’s global trade war is also stifling builder sentiment after it rallied postelection, according to survey data from the National Association of Home Builders/Wells Fargo Housing Market Index. Sixty percent of builders said their suppliers have already increased or announced increases on materials prices because of tariffs, according to the survey. All told, builders are estimating a typical cost bump of almost $11,000 per home.

Rent has also risen for three straight months after cooling late last year, per Apartment List. And home prices keep ticking up, rising 3.9% in February, according to data released last week from the S&P CoreLogic Case-Shiller Index.

Finally, economists from the Mortgage Bankers Association lowered their estimates for existing and new-home sales in 2025. And they expect just over 1 million single family starts for the next two years. (Experts generally say the United States is short between 2 and 4.5 million homes.)

The markers are a snapshot of an economy in uncharted territory once again. After the Federal Reserve finally managed to wrestle inflation down from 40-year highs, officials are warning that Trump’s trade war will send prices back up. The latest GDP figures marked the first contraction since early 2022, when the pandemic and supply chain snarls still had a grip on the U.S. economy. Economists and Wall Street analysts are on watch for signs of a recession, especially if employers start pulling back on hiring and investment, or lay people off. Downturns often bleed quickly into the housing market, especially if spikes in unemployment cause people to fall behind on their mortgages.

Some in the housing market have been able to dodge swirling economic forces and stay relatively unscathed. Roughly a third of home purchases were made in cash in 2024, according to Redfin. National home builders have extensive supply chain contracts that can source materials for lower, fixed costs and dodge wild swings in tariff policy. Builders that cater to wealthier buyers have more cushion to raise their prices.

But others are caught in the middle.

Bill Vallaire and his wife love their five-bedroom home in Prescott, Arizona, that has enough room to host their grandkids. They moved in 2007 and have since refinanced their mortgage rate to below a hard-to-leave 3%.

But now, much of Vallaire’s time is spent driving 100 miles south to Phoenix for his wife’s medical care. He has considered selling the house and moving closer to the city to cut the two-hour journey. But home prices in Phoenix or Scottsdale would probably kick his mortgage payment up from $2,500 to around $9,000 per month. Add the cost of living and homeowner fees, and Vallaire doesn’t think the math would work unless rates slip below 5%.

“We don’t need that big of a house, but until things break on mortgage rates, we’re kind of stuck,” he said.

Dietz, of the builders association, said he has been focusing on inflation expectations to fill in a picture of where the market is headed. March survey data from the New York Fed showed households think inflation will rise in the short-term, that their income growth will slow, and that their financial situations and credit access will decline in the year ahead. That could all mean less business for builders as people shy away from major purchases and generally scale back spending.

Dietz is also constantly on the road talking to builders seeing price hikes from tariffs, on such things as appliances from Mexico and hardware from China. Canadian lumber has been exempted from some of the latest levies. But that leaves plenty of “the nuts and bolts used to make a home” subject to steeper costs, he said.

Still, Alan Simonini hasn’t felt much change in the Charlotte area. The luxury home builder said he has had one customer make deposits on light fixtures and low-voltage wiring to get ahead of suppliers’ price increases that started May 1. Beyond that, Simonini plans to carry on as usual.

“I think that all this stuff is going to go away in a few months when everybody comes to the table and creates a new deal with our government,” he said. “It might be a temporary quarter of price increases. But I really anticipate it’s not going to go up more.”

In the Washington area, Sam Medvene, president of the DC Association of Realtors, is keeping an eye on what happens to the job market, and whether massive cuts to the federal government spur more people to sell their homes. He thinks the end of September will be telling — when many federal employees who took buyout offers stop getting paid. Until now, there have generally been more buyers than the number of homes available, putting upward pressure on prices. But that dynamic could flip if there’s an influx of listings later this year.

Medvene said it would be telling to see whether unemployment causes a spike in inventory, so much so that it outpaces demand.

Outside Phoenix, Nate and Margie Sanchez aren’t going anywhere. The couple had been trying to sell their house and move onto a lot with more land. But when they listed their house for $720,000 in January, they felt the market shift, with buyers shying away from homes that rose drastically in value since the pandemic, combined with the strain of high rates. The Sanchezes lowered the price all the way down to $640,000 before deciding to pull it off the market.

“We had a buyer who wanted a new roof, money toward AC, when we already dropped our house [price] by 60 grand,” Nate Sanchez said. “It was a tipping point for us to stay where we were at.”