The Housing Market Paradox

January 17, 2025 |
2 minute read
|
The Housing Market Paradox
3:36

The U.S. housing market stands at a critical juncture as sectors adjust to the anticipated Trump administration. While various industries are pricing in different expectations, housing faces unique challenges at the intersection of immigration policy, tariffs, and monetary policy.

Market data since 2020 reveals a concerning pattern: despite a steadily expanding construction labor force and stable new home sales, housing starts have declined sharply. This divergence has become particularly pronounced since mid-2022, with transaction volumes falling to levels reminiscent of the 2008 financial crisis.

CHT-Housing-Market-Divergence

The outlook offers little relief under the Trump administration’s proposed policies. Expected tariffs could intensify inflationary pressures, complicating Federal Reserve rate decisions and perpetuating the current high-rate environment. With mortgage rates at 7 percent and market normalization requiring 5.50 percent, affordability remains a crucial barrier. Homebuilders face additional pressure, with industry stalwart Lennar projecting tariff-related cost increases of $5,000-$7,000 per unit. While the administration's proposal to open federal lands for housing development could help address the 4.5 million home shortage and bypass local zoning restrictions, it would still confront the same fundamental labor and cost challenges.

Immigration policy presents another critical concern, particularly given the construction sector's workforce composition. Immigrants make up 26 percent of the labor force, including 13 percent unauthorized workers. This dependency is even more pronounced in key growth markets - New York, Texas, Florida, California, and Nevada - where immigrants constitute 40 percent of the construction workforce. These regions face heightened vulnerability, even with potential federal land development opportunities.

The impact of these combined pressures will likely manifest in rising housing prices, particularly in the South. The region, which recorded a 5.2 percent monthly increase in pending sales in November 2024, faces unique exposure given its high concentration of immigrant construction workers and its dominance in new construction. Four consecutive months of increasing pending home sales indicate buyers are adapting to higher rates rather than awaiting decreases, intensifying supply pressures. The situation is further complicated by the region's delicate supply dynamics – the current multi-family oversupply is projected to shift to shortages by 2026-2027. This transition becomes more challenging under potential workforce reductions, as builders must balance immediate single-family demand with the need to maintain multi-family construction pipelines.

Market indicators already reflect these complex dynamics. The striking contrast between Fannie Mae and Freddie Mac's 400 percent+ post-election gains and the double-digit declines in homebuilder indices suggests the market anticipates strong demand but recognizes significant operational challenges ahead. While Trump has proposed solutions to address housing supply concerns, his administration has yet to reconcile these plans with the labor force constraints that would result from restrictive immigration policies. The homebuilding sector's recovery may hinge on how this contradiction is resolved.

Arjun Sawai

Author

Arjun Sawai

Associate

Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

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To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.