The Cracks in the Foundation: Why U.S. Housing’s Single-Family Sector is a Risk to Avoid

The U.S. housing market is at a crossroads. While multifamily construction has shown fleeting resilience, the single-family sector—the backbone of residential real estate—is buckling under the weight of declining permits, weakening builder confidence, and escalating costs. This divergence signals a brewing slowdown in housing activity that threatens to ripple through equity markets and real estate-linked assets. Investors would be wise to heed the warning signs and pivot toward caution.

The Single-Family Sector’s Downward Spiral

The latest data paints a grim picture for single-family construction:

• April 2025 permits for single-family homes fell 5.1% month-over-month, with year-over-year declines of 6.2%, marking the lowest rate since mid-2023.
• Single-family starts dropped 2.1% in April, extending a trend of weakening momentum, while completions fell 8% month-over-month, underscoring a supply-side contraction.

The numbers are clear: demand for single-family homes is cooling, and builders are scaling back plans. This is no passing blip. The three-month moving average of single-family permits has fallen by 5,000 units, and the inventory of homes under construction has shrunk to 630,000, down from 635,000 in March.

Multifamily’s Fragile Rally

While single-family construction falters, multifamily starts rose to 420,000 annualized in April, marking the third consecutive monthly increase. This uptick, however, is precarious:

• The surge is geographically uneven, with the West seeing a 22.8% regional decline in multifamily starts, offsetting gains in the Midwest and South.
• Multi-family permits dropped 4.7% month-over-month, suggesting the sector’s momentum is waning.

The divergence between starts and permits highlights a critical imbalance: builders are starting projects but not securing permits for future construction, a sign of hesitancy fueled by economic uncertainty.

Builder Confidence at a Decade-Low

The National Association of Home Builders’ (NAHB) Housing Market Index (HMI) for April 2025 hit 40, barely above the 31 low of December 2022 and well below the 50 threshold separating optimism from pessimism. Key pain points:

• 60% of builders report tariff-driven material cost hikes, adding $10,900 per home in expenses.
• Labor shortages and limited buildable lots persist, with 34% of builders cutting prices by 5% to attract buyers.

The HMI’s three-month moving average for all regions declined in April, with the Northeast, Midwest, and South all posting sharp drops. This is not a regional issue—it’s a systemic crisis.

The Perfect Storm: Costs and Rates

Two factors are exacerbating the housing slowdown:

1. Mortgage Rates: The 30-year fixed rate remains near 7%, pricing many buyers out of the market. With inflation sticky and the Fed’s policy uncertain, rates are unlikely to drop meaningfully soon.
2. Material Costs: Tariffs on steel, lumber, and other inputs have forced builders into a cost-price squeeze. The NAHB estimates that tariffs alone add $10,900 to the price of a single-family home, eroding profit margins.

These pressures are pushing builders toward sales incentives (now used by 61% of firms) and price cuts, but buyer traffic remains stagnant at historically low levels (25 in April), indicating weak demand.

Investment Implications: Avoid Homebuilder Equities

The data leaves little room for optimism:

• Homebuilder stocks (e.g., D.R. Horton (DHI), Lennar (LEN)) are vulnerable to declining starts and margins. Their valuations do not account for the risks of prolonged weakness.
• Housing-linked ETFs like the S&P 500 Homebuilders Select Sector ETF (XHB) face downward pressure as earnings disappoint.

Recommendation:
- Underweight allocations to homebuilders and housing ETFs.
- Consider short positions in homebuilder equities or hedging via inverse ETFs (e.g., ProShares Short Homebuilders (SBB)).
- Diversify into sectors less exposed to housing, such as technology or healthcare.

Conclusion: The Writing is on the Wall

The housing market’s bifurcation—single-family decline vs. multifamily’s shaky rebound—is a symptom of deeper structural issues. With permits falling, builder confidence in the dumps, and costs rising, the risks of a sharper slowdown are mounting. Investors who ignore these warning signs risk overexposure to a sector on the brink. Now is the time to pivot to safety and avoid the fallout.