Slower Home Construction And Sales With Steady Rates

For the rest of 2025, interest rates for mortgages aren’t like to change much while new construction and sales of new homes will continue a downward trend.

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Over the Summer, Moody’s Ratings issued a summary and report on shifts in the housing market. The analysis considered several releases from firms and agencies that regular report on movement in the housing market. According to S&P CoreLogic Case-Shiller and the Federal Housing Finance Agency (FHFA) home prices in the United States went down 0.4% in April from the previous month. This data was released in June. Home sales also fell 0.7% in May and declined dropped 6.3% since May of 2024 according to the United State Census Bureau.

Homebuilders are holding back on new construction as market conditions slow. Single-family starts and permits are both down about 6–7% from last year, while multifamily construction has also slowed. And interest rates look to remain at their currently levels of about 6.5%. According to Moody’s, these trends signal weaker growth in US housing supply for the remainder of 2025. I asked the authors of the analysis several questions about the data and direction of the market.

I quoted a section of the Moody’s document followed by a question. The quote and question are in italics followed by the answer by the authors of the analysis.

“However, active listings in many other states and markets remain constrained compared to pre-pandemic levels, causing even more price appreciation and limiting the risk that supply exceeds demand in the near term. While many US homeowners continue to be dissuaded from moving by the low rates, they locked in during 2020-22, that dynamic is slowly fading as borrower incomes rise or family situations change. Overall, the available supply of the existing homes has been trending modestly higher nationally over recent months.”

Can you elaborate on where this might go based on other variables? If interest rates fall, will this break through the stagnation in the market caused by people holding on to their lower rate mortgages? Will prices fall far enough to motivate more movement regardless of rates? Will both combine to cause a big surge in demand?

“Uncertainty around the timeline and pace of the potential recovery in US existing home sales volumes is elevated in part due to higher interest rates. But slowing macroeconomic conditions also increase uncertainty.”

“We did not see a surge in buyer demand last September when the 30-year mortgage rate touched 6%, which indicates that demand is not likely to change materially until we breach those levels or are there in a sustained way at least. That said, if lower rates do drive buyers to all jump back into the market, it may create a price floor and even further raise home prices, particularly in areas like the Northeast, which have lower inventory compared to the rest of the country.”

Andrew MacDonald, Vice President and Senior Analyst at Moody’s Ratings (coverage area includes real estate brokerages)

“More generally, affordability is significantly constrained, so a big surge in demand is unlikely in the near term. Both interest rate declines and home price declines are expected to be only modest, so the impact will also be only modest. We have also seen that with time, some homebuyers have gotten adjusted to higher rates and gone ahead with their purchase decisions.”

“If demand weakens significantly, the likelihood of home price declines increases. However, home price resiliency has proven to be quite strong during this cycle, so meaningful home price depreciation is not expected in the near term.”

Natalia Gluschuk, Vice President and Senior Credit Officer at Moody’s Ratings (coverage area includes home builders)

“Meanwhile, homebuilders have pulled back modestly (see Exhibit 5) in response to softer markets this year.”

Given the possibility of shifts in demand caused by lower rates and excess supply, won’t we see an increase in production? Will the market respond with more single family or multifamily? Will there be a lag in production that will increase inflation in the housing market?

“We do expect to see an improvement in demand when affordability improves through both lower interest rates and home price softening. A meaningful pick-up in demand is not anticipated because affordability is not expected to improve significantly in the near-term, however. Homebuilders would respond with more single-family construction when there is a visible improvement in demand, so a lag in production is not anticipated. The declines we have seen in activity in the single-family market so far in 2025 represent relatively measured ones.”

Natalia Gluschuk

“Slower home starts and permits will help restrain any erosion of home values, though we expect new home prices will decline by a percentage in the mid-single digits this year, compared to annual drops of around 2% over the past two years, as builders lean on incentives such as temporary mortgage interest-rate buydowns and modestly shift their product mix toward more affordable offerings.”

Andrew MacDonald

Where does this point in terms of inflation in the housing market? Are you suggesting that in the years ahead we’ll see lower prices? Won’t this, when paired with lower rates, create a surge in demand? If builders are pulling back, won’t see prices climb?

“The builders are pulling back a little bit in response to demand weakening. But because affordability is so difficult the builders have been offering incentives to buyers to encourage home purchasing for the last few years, with this year’s incentives being higher than before”

Natalia Gluschuk

“There’s a number of factors pushing in different directions, so our forecasts have been for fairly steady values over the next few years. Ultimately, it usually takes some combination of large amounts of building or speculative investment, rapid changes in financing conditions, and significant distressed sales volumes to spark very material slumps in prices, and we don’t currently expect those, although more notable declines in specific markets are possible.”

Jody Shenn, Vice President and Senior Analyst at Moody’s Ratings (coverage area includes MBS in structured finance group)

“If prices further weaken, you may see sellers simply remove their listings until the market improves, which reinforces low supply.”

Andrew MacDonald