Divergent Signals in the U.S. Housing Market: Assessing Construction Activity and Equity Implications

The U.S. housing market in late 2025 is a study in contradictions. July 2025 data revealed a 5.2% surge in housing starts to a seasonally adjusted annual rate of 1.428 million units, driven by a 11.6% jump in multifamily construction to 470,000 units—the highest since 2023. Yet, building permits—a forward-looking indicator—fell 2.8% to 1.354 million units, with multifamily permits dropping nearly 10%. This divergence between current activity and future expectations raises critical questions about the sustainability of construction momentum and its implications for homebuilders and construction-related equities.

The Paradox of Housing Starts and Permits

The July data highlights a fragile equilibrium. Single-family starts rose 2.8% to 939,000 units, while multifamily construction surged, reflecting a shift toward apartment development amid rising urbanization and tighter vacancy rates. However, the sharp decline in permits—particularly for multifamily projects—signals waning confidence in long-term demand. This disconnect mirrors broader economic uncertainties: mortgage rates remain elevated at 6.58% (as of July), inventory levels near 2007 highs, and a labor market grappling with immigration-related shortages.

Analysts at J.P. Morgan note that the housing market is "frozen" through 2025, with growth capped at 3% or less. High rates have locked in over 80% of homeowners, creating a supply bottleneck. While speculative inventory in new homes has risen, it remains 50% above historical averages but far below pre-pandemic levels. This suggests that current construction activity is more a response to pent-up demand than a sustainable recovery.

Equity Implications: D.R. Horton, Home Depot, and Lowe's

D.R. Horton (DHI): The nation's largest homebuilder reported a 24% drop in Q3 2025 net income to $1.0 billion, with net sales orders flat at 23,071 units. Despite a 2.8% rise in single-family starts, D.R. Horton's gross margin contracted to 21.8% from 24.0% in the prior year, driven by aggressive price cuts and mortgage rate buydowns. The company's updated 2025 guidance—85,000–85,500 homes closed—reflects a 5% reduction from earlier forecasts. While D.R. Horton's disciplined capital returns ($1.3 billion in shareholder repurchases) offer a buffer, its exposure to affordability constraints and regional softness (e.g., a 10.1% decline in Florida sales) makes it a high-risk bet in a volatile market.

Home Depot (HD): The home improvement giant is navigating a dual challenge: shifting consumer demand and inflationary pressures. A 5% Q2 2025 revenue growth (the lowest in four quarters) underscores the strain of a slowing housing market. Home Depot's strategic pivot toward professional customers—bolstered by its $4.3 billion acquisition of GMS—aims to offset declining retail sales. However, its Q1 2025 profit miss and product catalog trimming highlight operational fragility. Analysts remain cautiously optimistic, with price targets raised on the back of its Pro services expansion, but rising material costs and potential rate cuts in September could test its margins.

Lowe's (LOW): Lowe's faces a steeper uphill battle. Projected 1.5% Q2 2025 revenue growth follows nine consecutive quarters of declines, and RBC Capital Markets has cut its 2025 earnings forecast. While its Q1 price hikes outperformed Home Depot's strategy, the company's reliance on a shrinking new construction market—now a drag on GDP—poses long-term risks. A "bullish" stock price (up 2.1% year-to-date) contrasts with weak comparable sales guidance, suggesting a market betting on a post-rate-cut rebound rather than current fundamentals.

Broader Risks and Opportunities

The housing market's sustainability hinges on three key factors:
1. Mortgage Rates and Fed Policy: A 0.25% rate cut in September could ease affordability, but Trump-era tariffs on steel, aluminum, and copper threaten to offset gains by raising construction costs.
2. Labor Shortages: Immigration-related uncertainties could exacerbate a 450,000-worker gap in construction, driving up wages and project delays.
3. Regional Disruptions: Wildfires in Los Angeles and supply chain bottlenecks (e.g., 40%+ copper price hikes) add localized volatility.

For investors, the divergent signals suggest a cautious approach. D.R. Horton's strong liquidity and shareholder returns make it a defensive play, but its margin pressures warrant close monitoring. Home Depot's Pro services pivot offers growth potential, while Lowe's faces a steeper repositioning challenge.

Conclusion: Navigating the Divergence

The U.S. housing market's mixed signals—strong starts but weak permits—reflect a sector caught between short-term resilience and long-term fragility. For homebuilders and retailers, the path forward depends on the Fed's rate trajectory, labor market stability, and the ability to adapt to shifting demand. Investors should prioritize companies with robust balance sheets and diversified revenue streams, while hedging against policy-driven risks. In a market where construction activity is both a lifeline and a liability, patience and agility will be key.