Housing Market Divergence: Capitalizing on Existing Home Resilience Amid New Construction Pullback

The U.S. housing market is at an inflection point. While existing home sales benefit from record inventory growth and improving affordability, new construction is stalling under the weight of rising mortgage rates and builder pessimism. This divergence creates a clear roadmap for investors: rotate capital into sectors benefiting from secondary market liquidity while avoiding overexposed homebuilders.

The Existing Home Rally: Strength in Liquidity

Existing home sales are powering ahead, driven by a buyer-friendly inventory surge. National active listings hit a post-pandemic high in April 2025, up 30.6% year-over-year, while price reductions hit a 14-year high at 18% of listings. This creates a "sweet spot" for buyers: more options, lower prices, and modestly stable median home prices ($431,250 nationally). Key catalysts include:
- Falling mortgage rates: The 30-year fixed rate dipped to 6.83% in April from 7.1% a year earlier, easing affordability constraints.
- Regional rebalancing: The West and South, which saw inventory grow 41.7% and 33.3% YoY respectively, are softening prices to attract buyers.

This dynamic favors real estate investment trusts (REITs) and home improvement retailers, which thrive on transaction volume and home maintenance demand.

New Construction Stalls: The Builders’ Dilemma

Meanwhile, new home sales are faltering. New listings grew just 9.2% YoY in April, far below the pace of existing home inventory growth. Builders face a perfect storm:
- Overbuilding in Sun Belt markets: Phoenix and Tampa saw 31%+ price reductions on new listings, signaling oversupply.
- Mortgage rate volatility: Rising rates (up 21 bps in April alone) deter buyers while builders grapple with rising material costs.
- Geographic mismatches: Markets like Denver (+24.7% new listings) are oversaturated, while affordable regions like the Midwest lag in supply.

This makes single-family homebuilders like Toll Brothers (TOL) and Lennar (LEN) risky bets. Their valuations are tied to speculative construction, which now faces a prolonged slowdown.

Fed Rate Cuts: The Catalyst for Existing Market Momentum

The Federal Reserve’s expected rate cuts in 2025 will amplify this divergence. Current forecasts suggest 2-3 cuts by year-end, lowering the federal funds rate to 3.5%-4%. Key triggers include:
- Inflation moderation: Core PCE inflation is projected to fall to 2.8% in 2025, below the Fed’s 2024 target.
- Trade policy risks: While tariffs pose upside inflation risks, the Fed is likely to prioritize easing to counter economic softness.

Lower rates will:
1. Boost buyer purchasing power, driving existing home sales growth.
2. Improve REIT fundamentals, as lower borrowing costs reduce property financing costs.
3. Undermine homebuilder margins, as land and construction costs remain sticky.

Sector Rotation Playbook

Investors should pivot to sectors benefiting from existing market liquidity:

1. Residential REITs (VNQ, O)

• Why: REITs gain as lower rates increase property valuations and rental demand.
• Catalyst: The Fed’s rate cuts reduce mortgage servicing costs for multifamily assets.
• Action: Overweight equity REITs with exposure to stabilized markets (e.g., Midwestern apartments).

2. Home Improvement Retailers (LOW, HD)

• Why: Existing home buyers increasingly opt for renovations over new builds.
• Catalyst: The 18% of listings with price cuts creates DIY demand for Home Depot and Lowe’s products.
• Action: Target retailers with supply chain resilience to inflationary pressures.

3. Mortgage REITs (MTGE, AGNC)

• Why: Falling rates narrow prepayment risks, boosting net interest margins.
• Catalyst: A Fed rate cut by September 2025 could trigger a rally in mortgage-backed securities.

Avoid: Single-Family Homebuilders (TOL, KBH)

• Risk: Overexposure to new construction in oversupplied regions.
• Valuation: Price-to-book ratios are 20%-30% above historical lows, offering little downside protection.

Data-Driven Confirmation

The trendline confirms that REITs outperform when existing home inventory expands, a pattern set to repeat in 2025.

Conclusion: Rotate Now or Pay Later

The housing market’s divergence is a sector rotation signal investors cannot ignore. Existing home resilience, fueled by inventory growth and Fed easing, offers asymmetric upside. Meanwhile, new construction’s struggles make homebuilders a risk not worth taking.

Act before the Fed’s September meeting: allocate to REITs and home improvement stocks while exiting speculative homebuilders. The existing market’s liquidity is the new alpha driver—and time is running out to capitalize on it.