New construction faltered in August as overall housing starts declined 8.5% on a seasonally adjusted basis, erasing gains made in July when starts rose to a five-month high.
Just 611,000 single-family homes were actively under construction in August according to U.S. Census Bureau data released Tuesday. Single-family housing starts fell to an annualized pace of 890,000 units last month, approximately 7% lower than July’s revised rate of 957,000. Overall housing starts were 6% lower than a year ago in August.
“This thinning pipeline underscores the broader cooling in the housing market, as builders remain cautious amid persistent headwinds,” commented Odeta Kushi, deputy chief economist at First American Financial Corp., citing the silver lining of a Federal Reserve interest rate cut that could ease builders’ financing costs in coming months.
The prospect of less expensive financing for their businesses and borrowers has improved home builders’ outlooks on future sales expectations. Wednesday’s update to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index showed future sales sentiment climbing to its highest level since March.
In response, more home builders reported cutting prices in September, in part because firms have fallen below their 2025 sales estimates. At the same time, borrower demands have shifted as markets continue to evolve in homebuyers’ favor through 2025.
Shifting borrower demand
“We have some markets with some of our partners that are underperforming what their 2025 projections were going to be and they’re throwing everything at it,” says Mike Iorio, senior vice president of strategic partnerships at Cornerstone Capital Bank, formerly Cornerstone Home Lending before the lender’s approval as a Texas state bank in 2022.
Iorio joined Cornerstone in April 2024 to spearhead expansion of its Homebuilder Partnership business, which he tells Scotsman Guide is concentrated among regional firms and national builders outside the 10 largest. Where builders are struggling to move units, traditional incentives like feature upgrades, rate buy-downs and cash cannot overcome low demand.
Other markets have continued to be successful with “forward commitments,” where builders secure below-market financing from lenders to offer more attractive mortgage terms to buyers, boosting sales of speculative and standing new-home inventory especially. The pace of forward commitments has slowed from 2024 to 2025, Iorio observes, while a separate “interesting shift” has occurred.
“I feel like 2024 was the year of the forward commitments,” Iorio says, with 2025 starting out the same. “More buyers, for whatever reason, are becoming less interested in cheap 30-year money and instead are taking the cash,” be it price reductions or reduced closing costs, he notes.
Expectations of refinance opportunities if mortgage rates continue easing may account for this shift, Iorio believes, along with the rising share of adjustable-rate mortgages. Overall, he thinks new-home sales performance has become more market driven as builders try to meet low borrower affordability thresholds, taking into account the overall state of the economy.
“You look at where inflation numbers are, you look at where wages are, the appreciation that was fueled by low interest rates years ago really hasn’t subsided. It’s flattened a bit, but it really hasn’t softened much, and then borrowing costs are up,” he says. “The average family of four with one wage earner, or even two, is working very hard to make ends meet.”
At 856,000 units, permits for the construction of single-family homes — a strong indicator of future home building activity — dipped 2.2% from July’s revised figure of 875,000. Overall housing permits fell 3.7% monthly to 1.312 million units, an 11.1% year-over-year slide, Census Bureau data show.
Losing affordability edge
New construction has played a vital role in contributing to available inventory in the inventory-constrained post-pandemic housing market. Since early 2020, new homes have added $2.5 trillion in housing market value, about 12.5% of total gains during that period.
Robert Dietz, chief economist at the NAHB, tells Scotsman Guide that price weakness over the next four quarters is expected to impact new-home and existing-home markets, with the existing-home market in particular having to do “the same kind of price discovery as builders did in 2023 and 2024” — that is, lowering their sale price expectations.
Dietz acknowledges an expectation that builders might have reduced their use of sales incentives heading into 2025, but mortgage rates remaining elevated through three quarters of the year has led builders to continue to be aggressive.
“That’s been the challenge of 2025,” says Dietz, highlighting the historically high share of new-home inventory. “New construction inventory for single-family is typically about 10% to 12% of total inventory, and new-home inventory is now about one-third.” That rising share represents more competition between builders and a loss of pricing power, particularly as borrowers find room to negotiate lower prices in the existing-home market.
Despite rising labor costs for builders, the year-over-year decline in the volume of construction activity has made it easier for builders to find crews, says Dietz, even as Trump administration immigration policy has cut off a key supply of workers to job sites. Within new-home construction, at least, the declining demand for workers has met the declining supply of workers, a situation Federal Reserve Chair Jerome Powell has described as “a curious balance.”
Should new-home construction accelerate, however, which the Trump administration desires, a rising demand for construction crews would tighten labor supplies. Builders also compete for crews with home flippers and a remodeling market that continues to expand in response to aging U.S. housing stock. The remodeling market has been aided by persistent rate lock-in effects and roughly $30 trillion in tappable home equity to keep it funded.
“Remodeling as a share of residential construction is about 40% of the industry. It’s a lot bigger than a lot of people think,” says Dietz, who expects remodeling to continue to gain market share in the long run over site-built construction. Lenders’ costs to originate home equity products enabling homeowners and investors to fund the remodeling market has declined significantly in recent years, supporting Dietz’s thesis.
“Household formations are going to fall off, there’s going to be more tear-down construction, there’s going to be more rehab of existing stock. That’s where the long-run growth potential of the industry is,” he concludes.
A recalibration period
The Mortgage Bankers Association reported mixed results for new-home demand in August, showing a 6% monthly decline in new-home purchase applications, but a 1% rise from a year ago. The new-home sales pace increased for its third consecutive month.
Phil Crescenzo Jr., southeast division manager for Nation One Mortgage Corp., says October new-home data will prove essential in determining whether second and third quarter slowdowns in new-construction activity represent a trend or a passing blip. He works with several of the nation’s top 10 largest builders.
“I’ve seen the lowest benchmark rate actually go up because forward commitments are running out,” he says, but with a catch: “Even though the market improved as far as pricing goes, they don’t want to rewrite those forward commitments at $500 million a pop for a higher interest rate if they don’t need it.” As in, better terms on forward commitments may be around the corner in 2026 if interest rates continue to fall.
Crescenzo specializes in new-construction fallout, partnering with a range of builders to close mortgages that the builders’ preferred in-house lenders cannot. Across the board he thinks builders have extended aggressive sales incentives “for a few more quarters than they may have wanted,” though strategies are changing on a market-to-market basis.
Price reductions of $30,000 to $40,000 have not been uncommon among some top builders, Crescenzo says. Others have allowed standing inventory to run over into the next month “to not give away the farm,” becoming more stingy with sales incentives at the start of the third quarter. He calls this a period of recalibration for many builders.
As existing-home sales prices kept rising in 2023 and 2024 despite high mortgage rates, builders leveraged captive new-home inventory, incentivizing borrowers with price cuts and 30-year fixed mortgage rates below market.
However, stagnating existing-home inventory in overbuilt new-home markets has softened prices overall, more recently increasing cross-competition to sales volumes. The slide to a buyer’s market has prompted these shifts, especially across the Southeast region where Crescenzo’s business is concentrated.
“Some of these real estate agents are getting agent bonuses,” Crescenzo says, citing commissions exceeding 3%. “When I see that I say to myself, ‘Well, somebody missed.’ That’s like, ‘We have to hit this number.’”
