Rising costs and tariff threats dampen homebuying activity
Homebuilders are heading into the spring selling season with far less momentum than in recent years, as high mortgage rates and tariff uncertainty weigh on buyer demand and builder outlooks.
KB Home reported a 17% year-over-year drop in net orders for its fiscal first quarter ending Feb. 28, and lowered both its average selling price and 2025 revenue guidance.
“Demand at the start of the spring selling season has been more muted than we have seen over the past few years,” CEO Jeffrey Mezger told analysts. KB Home now expects full-year housing revenue between $6.6 billion and $7 billion, down from its earlier range of $7 billion to $7.5 billion.
The company also trimmed its expected average sales price to $480,000–$495,000, down from $488,000–$498,000 previously, citing slower-than-usual buyer activity around Super Bowl weekend, typically considered the kickoff of peak homebuying season.
Lennar, the nation’s second-largest builder, echoed those concerns, noting a lack of the usual February lift in demand.
“We do not see the seasonal pickup typically associated with the beginning of the spring selling season,” said CEO Jonathan Jaffe during its earnings call. Lennar reported just a 1% annual increase in net new orders and projected 22,500 to 23,500 orders for Q2, short of analyst expectations.
Incentives are playing a growing role in maintaining sales activity, but they're also squeezing margins. Lennar reported a 1% decline in its average sales price, down to $408,000 after incentives. Its Q2 gross margin forecast of 18% fell below expectations, prompting Evercore ISI to downgrade the company, warning that incentives are “sustaining volume at dramatically depressed levels.”
Builders are also trying to manage affordability by shrinking home sizes or cutting upgrade options. Jay McCanless of Wedbush Securities said some are swapping 2,500–2,600-square-foot models for 1,700–1,800-square-foot homes to reduce prices.
Meanwhile, tariffs on construction materials, set to take effect in April under a new executive order from President Trump, add to the uncertainty. The National Association of Home Builders estimates the tariffs could increase costs by over $3 billion, or roughly $9,200 per home.
Read more: New home sales drop to three-month low as builders brace for higher costs
Private builders are especially on edge. A recent Wolfe Research survey showed new home orders from smaller builders rose just 22% month over month in January, well below the historical average of 39%. Builder confidence slipped three points in February, hitting its lowest level in seven months.
“At this point, for them to be able to drive much better demand without sacrificing margin, it's going to likely have to come in the form of lower mortgage rates or people regaining their confidence in the macroenvironment and in their employment situation, which both those parts are really out of builder's hands," Trevor Allinson, director and senior research analyst at Wolfe Research, said in an interview with Yahoo Finance.
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