Wallach Wisdom: Economic Impacts on Homebuilding for 2025

The economic landscape of 2025 is increasingly becoming a focal point for discussions surrounding the housing market. With shifts in tariffs, alterations in interest rates, and fluctuations in the job market, homebuilders are acutely aware of the factors that could either bolster or hinder their businesses. Dan Wallach, the CEO of Shepherd’s Finance and a former CFO of 84 Lumber for over two decades, provides valuable insights on the predominant elements likely to influence homebuilders in the upcoming years and those he believes pose minimal threat. 

One of the most pressing concerns for the housing market is the current interest rates for buyers. Wallach emphasizes that higher rates dampen potential homebuyers’ desire to purchase new homes, rendering housing generally unaffordable. He points out that home builders possess unique tools that can mitigate these challenges. Unlike average home sellers, builders can “buy down” mortgage rates, source the best interest rates, and offer distinctive financing products. Most critically, they provide brand-new homes, which many buyers prefer over older properties. 

However, high interest rates are suppressing home values across various markets. Wallach notes that a mere one-percent reduction in interest rates could catalyze substantial growth in housing market activity, potentially resulting in increased sales and even higher selling prices. Yet, as it stands, these elevated rates are holding home prices down, with some markets, particularly those that feature move-up homes, experiencing noticeable price drops. First-time buyers and high-end properties seem insulated from these declines, underscoring a complex market dynamic. 

These elevated rates sideline many potential homebuyers, particularly those considering their first home or looking to upgrade. If even a slight dip were to occur, the ripple effect could rejuvenate market momentum, signaling a positive shift for homebuilders. 

The confluence of unemployment rates and consumer confidence is another pivotal factor impacting the housing sector. Wallach says job security concerns are casting shadows over home sales, especially in certain regions. Markets heavily reliant on nonmilitary government jobs are facing significant hurdles. It’s a mixed bag; some regions thrive, while others struggle significantly. However, many of the latter fit the profile of markets adversely affected by political volatility linked to federal decisions. 

Job security is a significant determinant in whether individuals buy homes and affects overall consumer sentiment. Job stability apprehension motivates many potential buyers to postpone substantial financial commitments, such as long-term mortgages. Individuals understandably hesitate to embrace the added strain of monthly payments when their income isn’t secure. 

Internal migration patterns within the United States are shifting, with pronounced implications for housing markets. As Wallach explains, some states continue attracting new residents due to appealing job markets, climates, and living costs, whereas others see stagnant or declining populations. States in the Southeast appear to be experiencing growth due to their more favorable housing markets and job opportunities, while Northeastern states like Virginia are witnessing more people leaving, largely fueled by concerns about job security and reduced economic opportunities. 

This migration affects surface-level demand for housing as families seeking affordable living situations and job stability gravitate toward the Southeast. Homebuilders in those burgeoning areas can find fertile ground for business, while those in the Northeast may face challenges as buyers become increasingly scarce. This geographic divergence underscores the impact of economic fluctuations on housing demand. 

One of the more daunting aspects of the current market revolves around second-time homebuyers. Wallach remarks that many individuals who purchased starter homes in previous years are disinclined to move up the property ladder. For many, the jump would mean paying three times as much for a larger home while simultaneously locking in a mortgage rate that is 2.5 times higher than they are currently paying. Thus, many would-be sellers are effectively “stuck” in their homes. 

In scenarios pushing these homeowners to sell, even a one-percentage-point reduction in mortgage rates could entice buyers who are presently hesitant. However, Wallach is skeptical about a forthcoming rate decrease. He cites the federal government’s excessive spending relative to its revenue as a significant factor contributing to higher interest rates, which in turn affect potential homebuyers.

The position of many existing homeowners highlights an essential truth: the prevailing economic climate is fraught with uncertainty, often leading to stagnation in housing inventory. Homeowners are wary of surrendering their low interest rates; this fear hampers the fluidity of the housing market and restricts the options available to new buyers.

Lastly, Wallach touches on a critical aspect influencing housing demand—immigration patterns, particularly illegal immigration. While the numbers of individuals who migrated illegally into the United States in recent years remain relatively stable, the flow of newcomers has slowed significantly. This translates to decreased demand for housing, as fewer populations entering the market mean fewer people needing homes. 

The deceleration in migration can directly impact homebuilders, sparking a decline in demand for both new builds and existing homes. This trend could lead to excess inventory in specific markets, affecting pricing strategies and profit margins for real estate developers and builders alike. 

Various economic factors are often scrutinized for their potential impact on the homebuilding industry. Based on recent analyses, it appears that significant changes may not be on the horizon for homebuilders. Here’s a closer look at the key components influencing this stability:  

The National Association of Home Builders (NAHB) has projected that the impact of tariffs on home prices will be minimal. For instance, if tariffs were to increase the cost of materials valued at $100,000 by 20%, this would add only $20,000 to the overall price of a home that typically sells for around $400,000. This increase equates to just 5% of the total price, a figure experts believe is unlikely to materialize given expectations that most tariffs will not remain in place. Overall, while tariffs may capture headlines, their effect on homebuilding material costs is expected to be short-lived and relatively inconsequential. 

When it comes to land costs, the changes appear to be region-specific. In the Northeast, a decrease in demand may render land more affordable, whereas areas in the Southeast may experience rising prices due to heightened demand. Despite these potential regional fluctuations, experts concur that overall land costs are likely to remain stable, with no significant nationwide changes anticipated.

Labor costs in the homebuilding sector are predicted to see little change across the country. Although there have been shifts in non-military government employment, the sectors directly associated with homebuilding—including contractors, builders, and real estate professionals—are not expected to face notable labor cost increases. Stability in this area is likely to continue, allowing homebuilders to maintain operational consistency.

The conversation surrounding AI often generates curiosity, particularly regarding its future implications. Experts suggest that while automation has permeated many industries since the days of Henry Ford, the impact of AI in homebuilding will remain limited in the near term. Current advancements may enhance efficiency, but they are not expected to disrupt the workforce in a significant way by 2025. Instead, we might see real transformative effects in the long term, particularly for future generations in various industries. 

In summary, the influences on the housing market as we approach 2025 are complex and multifaceted. As Dan Wallach articulates, the confluence of higher interest rates, job security issues, internal migration shifts, constraints on second-time homebuyers, and changing immigration patterns creates a challenging environment for homebuilders. While these dynamics can be daunting, they also present opportunities for those willing to adapt and innovate in response. 

For home builders, the focus must remain on leveraging the financial tools available to effectively market new homes, exploring incentives to facilitate purchases, and becoming adaptable in responding to demographic shifts and market demands. Ultimately, navigating this landscape requires a combination of strategic insight, responsiveness to economic indicators, and a commitment to understanding the needs of current and future buyers.  

As we look ahead to 2025, it is clear that homebuilders will need to stay attuned to these factors and remain agile in their approach, ensuring they can effectively deliver solutions that meet the challenges presented by the evolving economic landscape. While uncertainty exists, the potential for growth remains—especially for those who seek to understand and adapt to the market’s changing tides. 

We invite you to consider how Shepherd’s Finance can help you empower your residential construction projects. With our tailored lending solutions and business growth services, we’re here to support you at every step. Thank you for being with us—let’s build something remarkable together! Find your regional sales manager today for more information or to get started. Happy building!