Cutting Our Near-Term US Homebuilding Starts Forecast Amid Economic Uncertainty

US global trade policy has weighed on both consumer and homebuilder confidence. The spring selling season is off to a slow start, and there is an above-average supply of new, unsold homes.

Why it matters: We’ve been keeping a close eye on the number of completed unsold homes, which reached 121,000 units in February, above the 90,000-unit 50-year historical average but still below the housing crisis peak of 199,000 units in early 2008.

• We were hopeful that homebuilder sales incentives would continue to drive a strong sales pace, shrinking the supply of completed unsold homes, even as homebuilders modestly increased construction starts.
• However, considering Morningstar’s more cautious near-term economic outlook, we expect homebuilders will start fewer homes to reduce unsold inventory.

Big picture: Morningstar expects real GDP growth to shrink to 1.2% in 2025 and 0.8% in 2026, inflation to reignite to around 3% over the next two years, and the unemployment rate to reach 4.8% in 2026. We assume the United States narrowly avoids a recession.

• On the bright side, Morningstar projects the average 30-year fixed rate mortgage to decline to 5.5% in 2026 and 5.0% in 2027, down from approximately 6.6%. Lower mortgage rates should buoy demand for new homes, even in a slow economy.
• We now forecast housing starts to decline approximately 3.5% in 2025 and 1.0% in 2026. However, there is downside risk to our forecast if the US economy sinks into a recession.

The bottom line: Even so, our longer-term outlook for new residential construction is mostly unchanged. We continue to see a need for more homes in the US, and we project annual housing starts will exceed 1.5 million units by 2028-29, amid healthier economic conditions.

• As such, we don’t expect to materially change our fair value estimates for DR Horton DHI ($143 per share), Lennar LEN ($164), and Toll Brothers TOL ($140). We see all three stocks as undervalued.