Housing Starts: A Bottoming Market and Tactical Opportunities in Homebuilders?

The U.S. housing market has been a battleground of opposing forces in 2025: stubbornly high mortgage rates, lingering supply-chain constraints, and shifting buyer preferences. Yet beneath the surface, subtle shifts in permits, regional performance, and construction trends suggest a potential bottoming process. As investors await the June housing starts data, the question is clear: Could this be the turning point for homebuilders, or are the headwinds too strong?

The Data Narrative: Permits Hold Hope, Starts Lag Behind

The June 2025 building permits report offered a glimmer of optimism, with permits edging up to 1.394 million—just above the consensus estimate of 1.393 million. This modest beat underscores resilient demand for suburban and exurban housing, as single-family permits rose to 898,000 in May (the latest data), even as multi-family permits dipped to 444,000. The divergence here is critical: Single-family construction, fueled by low urban density and rising interest in home offices, remains a pillar of demand.

Meanwhile, housing starts fell by 9.8% month-over-month in May, highlighting a persistent lag between permit approvals and actual construction. This delay is partly due to labor shortages and rising material costs, but it also suggests pent-up demand could translate into stronger starts once bottlenecks ease.

Regional Dynamics: Sunbelt Resilience vs. Coastal Stagnation

Geographic disparities are sharpening. In the South and West, inventory growth has surged, with markets like Austin and Las Vegas adding homes at double-digit rates. These regions, driven by job growth and affordability, are absorbing much of the construction activity. Conversely, the Northeast and Midwest remain constrained by legacy supply shortages and slower population growth.

However, a key risk looms: Overbuilding in overheated markets like Phoenix or Miami, where delistings (homes pulled off the market) surged 47% year-over-year in June. This seller frustration could signal a correction in pricing, but it also hints at a shift toward more balanced inventory levels—a precursor to renewed buyer activity.

The Fed's Crossroads: Rates, Inflation, and Housing

The Federal Reserve faces a delicate balancing act. While the slight uptick in permits might signal economic optimism, rising material costs (e.g., lumber, steel) are feeding into broader inflation metrics. The Fed's reluctance to cut rates anytime soon—despite mortgage rates nearing 7%—suggests homebuilders will endure a prolonged period of high borrowing costs.

Yet there's a silver lining: If June's housing starts data surprises to the upside (even modestly), it could spark a technical rebound in construction stocks. Historically, permits exceeding expectations have boosted construction-linked equities by 4.2% over 30 days, as investors bet on improved cash flows for homebuilders.

Tactical Investment Play: Target the Right Builders

The playbook for investors is clear: Focus on single-family specialization and regional resilience.

• KB Home (KBH) and Lennar (LEN), which lean heavily on suburban and exurban markets, stand to benefit as permits drive future starts.
• Regions to watch: Texas, Arizona, and Florida, where inventory growth is outpacing demand declines.
• Avoid overexposure to multi-family developers like Equity Residential (EQR), which face headwinds from urban market softness and rising costs.

Risks and Caution Flags

• Overbuilding in overheated markets: A surge in starts could lead to excess inventory in regions like the Sunbelt, pressuring prices.
• Fed policy missteps: If inflation stubbornly resists decline, rate cuts could be delayed beyond 2026, prolonging the housing slump.
• Labor shortages: Delays in construction timelines (e.g., 31% of projects taking over two months to start) remain a drag on near-term growth.

Conclusion: A Selective Opportunity

The June 2025 housing data will be a litmus test for whether the market is stabilizing. While headwinds like high rates and regional imbalances persist, the resilience of single-family demand and permit growth suggest a bottoming process is underway. Investors who target builders with strong geographic exposure and avoid multi-family overexposure could capture gains if the data surprises to the upside.

The Fed's next move, however, remains the wildcard. Until rates retreat, the housing rebound will be uneven—but patient investors may find pockets of outperformance in this critical sector of the economy.

Stay tuned for the July housing starts report, which will further clarify this narrative.