Heading into 2025 there’s a fair amount of optimism within the construction industry based on a variety of economic indicators and trends that affect competition, consumer confidence, and business activity.
Over the coming months, the forecast is that housing inventory will remain tight, as prices continue up and affordability remains a challenge for would-be home buyers. While single-digit growth is expected in the new construction industry, there is a significantly positive outlook for existing home contractor work—including remodeling and repairs—in the year ahead.
For building materials manufacturers, these construction industry trends present unique opportunities to rethink your offerings’ perceived value to customers. Retaining customer loyalty will be as much a measure of success in the years ahead as acquiring new customers.
What is the Macro-Economic Outlook for 2025?
There are several factors that shape the outlook for home-building firms and home improvement contractors, including the general state of the economy.
Here is a closer look at the macro-economic factors currently affecting the building materials industry and the 2025 outlook for builders, remodelers, and GCs:
1. National Economy Takes a Small Turn
The national economy has been lagging for the past couple of years. However, The Conference Board's Leading Economic Index increased by 0.3% in November 2024—the first uptick since February 2022, which no longer signals an impending recession. This slight boost in the LEI was supported by a rebound in building permits, continued support from equities, improvement in average hours worked in manufacturing, and fewer initial unemployment claims.
2. The Rate of Inflation is Decreasing While Prices Remain High
In August 2024, the inflation rate decreased to its lowest level in about three-and-a-half years. However, with a slight increase in November, according to the Consumer Price Index, the current inflation rate is approximately 2.7% for the past 12-month period. Yet while inflation has been slowing down since in 2021 and 2022, overall prices for consumer goods are still significantly elevated. Families and individuals across the country are feeling the pressure of high prices, which causes them to be more frugal with purchases and make tradeoffs that influence where and how they spend money.
3. Consumer Confidence Looks to Be Improving
Additionally, interest rate declines will have a positive impact on consumer confidence, which recently has been a more telling indicator of consumer spend. One of the worst things for home improvement is “uncertainty,” and there is plenty of it in today’s market putting downward pressure on both DIY activities and on pros to deliver projects in a budget-sensitive market. For the past 4 years, our researchers at The Farnsworth Group have tracked DIY activities and Pro activities on a quarterly basis, and will continue to track each's activities throughout 2025.
Housing Market Outlook for 2025
Looking deeper into the construction and remodeling industry, we see fundamental indicators are strong. Here is a look at some current trends and forecasts related to key indicators in the housing market:
1. Housing Prices
Lack of supply will keep housing prices relatively stable in 2025, and home values are likely to increase about 3%. The pervasive sentiment among 4 out of 5 consumers is that now is not a good time to buy a home. Rising home prices, along with higher interest rates continue to make it more appealing to invest in home improvements instead of moving, which is expected to drive growth in the remodeling market.
2. Single- and Multi-Family Home Builds
2025 Outlook for Single-Family Starts
Single family permits, starts, and completes—a leading indicator of future construction activity—have been sluggish in 2024 as costs increased, along with elevated mortgage rates. This continues to increase the national problem of under-building SF homes.
According to curated data from NAR in The Farnsworth Group’s Construction and Remodeling Industry Drivers and Forecast Study, there is improvement in the 2025 outlook, with 1.15 million single family home starts expected for 2025, compared to 970,000 in 2024. These new home starts will add a much needed increase to housing inventory.
2025 Outlook for Multi-Family Starts
Meanwhile, multi-family construction has slowed because of loan payment rates going up, increasing input costs, and increased inventory coming online in 2024 and 2025 from elevated multi-family starts back in 2021 and 2022. About 350,000 MF home starts are projected for 2025, compared to 360,000 in 2024.
3. Housing Inventory Levels
Existing home supply remains very low for current demand. The new home supply is hovering around a nine-month supply while there is a less than four-month supply of existing homes. A six-month supply is considered healthy.
4. Housing Affordability
Housing affordability also plays a role in the housing market fundamentals. Currently, the Housing Affordability Index—which measures whether a typical family earns enough to afford the monthly mortgage payments on a typical home—remains at 20 year lows, a result primarily from high home prices and high mortgage rates. As a result, would-be buyers are delaying their purchase due to lack of affordability.
First time homebuyers have been stretching for the past several years to afford payments, and both builders and smart resellers have been significantly helping with the challenge facing these buyers who need to either amass a sizeable down payment, get a break on interest rates, or ideally both.
Affordability, high home prices, low inventory and high home equity also continues to reduce mobility rates by keeping homeowners in their homes. This will result in more existing home projects as the housing stock ages and homeowners have few options but to remodel their current home.
First-Time Homebuyer Scenario
As of November 2024, the median sales price of a home in the United States was $420,400 and a conventional 30-year mortgage could be secured for about 6.98% mortgage rate for the typical borrower. Assuming the purchase price of the home is $420,400 and the loan term is 30 years, here’s a look at what a first time homebuyer’s monthly payment outlook is based on a simplified range of options they have in the current market:
- 3% ($12.6k) Down, 6.98% APY = $3,132/mo
- 20% ($84k) Down, 6.98% APY = $2,233/mo
(Note: This simplified look does not include other compulsory monthly costs, such as PMI and taxes.)
At an option where the monthly minimum payment is nearly $3,200/mo plus additional, compulsory cost of ownership line items, the typical household needs to earn roughly $130,000 per year in order to responsibly enter the current housing market. This means only households in the top 20% of income earners can currently afford an average home in current market conditions.
How to Keep New Home Inventory Moving in 2025
The above simplified look at first time homeowners' options makes it clear why the move to offer rate buy-downs by public builders especially, has been keeping housing stock moving despite the high house prices and high interest rate market environment. Builders have been responding to sales pressures by cutting prices and offering sales incentives.
Thus, any sort of market changes in 2025 that create options for homeowners to get into the market more favorably (i.e., job creation, lower inflation/interest rates, lower home prices, more housing inventory) will drive increased demand, and any continued market changes that add more strain (i.e., job losses, higher inflation/interest rates, higher home prices, less housing inventory) will drive decreased demand.
5. Home Sales
All this in mind, if makes sense why sales of existing homes are down substantially year-over-year because of rising interest rates and high costs coupled with low consumer confidence, economic uncertainty, and a large shortage of inventory. One of the leading indicators of home sales activity is the Mortgage Market Index (MMI), provided by the Mortgage Bankers Association of America. From November 2020 to November 2024, the index has dropped from over 800 to 192.4.
6. Building Materials and Products Costs
Since 2020, there has been a notable rise in costs for key construction materials, but recent declines in demand are causing some prices to fall. The Federal Reserve Bank’s Producer Price Index (PPI) for Construction Materials has declined from approximately 334 at the start of 2024 to about 327 in November. In particular, iron and steel has seen a significant decline in year-over-year costs, while materials such as softwood lumber and ready-mix concrete are still high.
Opportunities and Challenges Faced by Industry Pros
Contractors across specialties have been staying busy in 2024. For most project phases, approximately half of contractors reported increased activity in quarter three of 2024 compared to a year ago, according to our findings in the Quarterly Contractor Activity Tracker. This includes projects bid on, projects awarded, projects started, and projects completed.
Some of the main drivers of project cancellations and postponements include schedule and/or timing; material availability; and a decision by the homeowner. Throughout 2024, securing skilled labor has also become an increasing challenge, in terms of availability, costs, and quality. This is a reflection of the state of the workforce on a larger scale. Data from the U.S. Bureau of Labor Statistics shows that participation in the workforce has steadily declined for nearly two decades. After falling dramatically during the COVID-19 pandemic, participation is on a steady rise, but well below what is needed. Approximately 39% of contractors feel there is a need for a stronger focus on training, highlighting the workforce development challenges they’re facing.
In general, competitiveness has intensified in 2024, with 27% of contractors noting significantly more competition in Q3—up from 20% in Q2—which has created additional pressure within the industry. Despite these headwinds, more than two-thirds of professionals expressed a sense of optimism, expecting a steady growth in the home improvement market over the next year. Another 73% of firms are projecting revenue expansion over the next 12 months.
Furthermore, data from The Farnsworth Group’s separate Quarterly Contractor Index shows steady confidence among remodelers, mechanical contractors, finish contractors, and landscape contractors, who all are staying busy with healthy backlogs across the board. The only industry segment that is experiencing a decrease in confidence is exterior contractors.
The biggest growth opportunities for homebuilders and contractors include energy efficiency and renewable energy installations and technology integration.
Planning for Home Builders’ Needs
Industry professionals have to become strategically flexible in order to navigate the dynamic—and sometimes rapidly changing—housing market and the various macro-economic forces that create an impact on housing. Buyer sentiment has created an environment where contractors must compete more fiercely to win new business.
When dealing with both manufacturers and suppliers in the construction materials market, contractors frequently cite product availability and delivery times as their primary challenges. Poor product quality has also become more prevalent in the third quarter of 2024 and we heard from our live Pro panel at the 2025 Building Products Customer Workshop that these Pros are actively switching suppliers when the can't get a hold of their reps or products they needed.
Top priorities for builders in 2025 will be:
- Tightly controlling project costs
- Tightly controlling project timelines
- Managing project quality and client expectations, while optimizing the efficiency of crews to compensate for labor challenges
- Securing new business from a smaller pool of prospects and with increased competition
As homeowners are particularly budget sensitive because of economic conditions, they are making tradeoffs on where and how they spend, and contractors must respond. Manufacturers and suppliers must offer a breadth of prices and value propositions to accommodate a range of needs.
Building materials manufacturers must be prepared to help Pros with effective offerings, quality product choices at competitive prices, convenient distribution channels, and customer-centric marketing methods. You will increase Pro loyalty to your brand by tailoring your go-to-market strategy to meet builders where they’re at during any challenging economic conditions that force builders to make trade-offs in their supplier and product selections.
Gaining Insight for Building Products Manufacturers and Suppliers
To learn more about what contractors are doing and thinking when it comes to purchasing building materials in 2025, request access to the latest Construction and Remodeling Industry Drivers and Forecast Study from The Farnsworth Group.
Our team also can work with you to conduct customized market research for your business. Whether your focus is on selling to new home builders, remodelers, or specialty tradespeople, our researchers are equipped to reach hard-to-reach-pros for custom market research studies to get you the insights that you need to drive business forward.
