What Are the Forces Shaping the Future of Homebuilding?

Episode 45 | The Construction Lending Podcast

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Dr. Robert Dietz, Chief Economist for the National Association of Home Builders (NAHB), analyzes the housing market’s 2025 performance and the outlook for 2026. The discussion examines the current structural housing deficit and the industry’s path toward normalization by the 2030s. Dr. Dietz tackles questions about housing deficits, the boom in townhouses, custom home market trends, regulatory roadblocks, and why remodeling is making up an ever-larger share of construction activity.

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Questions Answered

• How do interest rates and government policies practically impact builders and buyers on a day-to-day basis?
• What role should local governments play in encouraging or regulating new types of housing construction?
• What do you think is driving the growth of renovation, and how does it change the landscape for lenders, builders, and home buyers?
• What are some of the regulatory barriers to building more housing, especially regarding zoning and permitting?
• Is enough being done to close the housing gap, or are there better strategies that could be pursued?
• How should builders, policymakers, and lenders adjust their strategies for a shrinking or changing population?
• How is the future shaping up for 2026 and beyond in terms of single-family, multifamily, and remodeling markets?

Navigating the Housing Market: Understanding the Trends, Challenges, and Opportunities Shaping U.S. Residential Construction

The housing market has always been a dynamic intersection of economics, policy, and individual aspiration—few voices are more equipped to untangle its complexity than Dr. Robert Dietz, Chief Economist at the National Association of Home Builders (NAHB). Dr. Dietz breaks down where the market stands, how it performed in 2025, and what might be ahead for builders, lenders, policymakers, and homebuyers alike.

Drawing from decades of economic research, on-the-ground experience, and the latest industry data, this discussion illuminated the forces shaping construction lending and housing supply today. 

Deciphering Data: The Evolving Landscape of Housing Analytics

One recurring theme in the conversation was the challenge of navigating the avalanche of housing data. Definitions shift, market segments evolve, and new trends (like single-family build-to-rent) emerge. Dr. Dietz revealed that even with decades of experience, his team remains “constantly uncomfortable” because the pace of change is relentless.

The use of technology—including AI-driven analysis—has helped NAHB economists extract trends from member surveys more efficiently, but human travel and face-to-face engagement remain essential for understanding the nuance behind the numbers.

While better data and AI accelerate information-sharing and prediction, the impact on building cycles is paradoxical. Yes, technology has smoothed inefficiencies (such as material deliveries and pricing forecasts), but Dietz observed that this only highlights other persistent bottlenecks—labor shortages, land supply constraints, and, for small builders especially, the limited availability and cost of construction loans.

A Disappointing 2025: Factors Behind the Market’s Performance

Looking back at 2025, Dr. Dietz’s analysis was succinct: “disappointing.” Despite early hopes for regulatory relief and tax cut extensions, uncertainty plagued the market and kept buyers waiting and builders scaling back. Instead of flat or slightly up single-family starts, the industry saw a 7% decline.

Wild cards like tariffs and the Fed’s interest rate policies further dampened momentum. Multiple rate cuts had been expected, only to be delayed for most of the year, keeping both mortgage rates and construction lending rates high. As a result, builder sentiment and buyer traffic faltered, with many prospective homeowners choosing to sit on the sidelines.

Tariffs: Much Ado About Lumber (and More)

Tariffs loomed large as a theoretical risk in 2025, especially regarding softwood lumber from Canada, which supplies roughly a quarter of U.S. needs. While headline duty rates climbed from 15% to 30%, the feared additional tariffs did not fully materialize; effective rates topped out closer to 40% rather than the catastrophic 80% some had modeled. Lower-than-expected demand for lumber, paired with modest tariff implementation, meant practical impacts on home prices were relatively minor—most builders saw few cost increases directly attributed to tariffs.

However, indirect effects could ripple through certain regional economies (think Michigan, Ohio, or border states tied to trade in appliances and auto parts), potentially weakening local labor markets and contributing to overall economic uncertainty.

Silver Linings: Custom Building and Townhouse Expansion

Despite the sobering performance in the broader market, two niche segments stood out in 2025:

• Custom Home Building: This market, driven by older and wealthier buyers, grew steadily. Its health correlates more with stock market performance than mortgage rates, adding stability even during interest rate fluctuations.
• Townhouses: Construction expanded dramatically—up to 18% of single-family building, doubling its share in just a decade. Townhouses provide a middle ground: denser than detached housing, but still offering individual ownership and a front door. As housing affordability becomes more urgent for millennials and other younger buyers, townhouses are an increasingly attractive choice.

Crucially, townhouse growth is strongest where zoning allows smaller lots and higher densities. Where regulation remains rigid, this expansion is stifled.

Manufactured, Modular, and Panelized Homes: Potential Yet to Be Realized

Another avenue for supply growth lies in off-site construction—manufactured (traditionally mobile) homes, modular homes, and panelized building. The potential for efficiency and productivity gains is high, particularly in labor-constrained markets. Yet, the actual market share of off-site building has declined from 7–8% in the late 1990s to around 3% today, mostly due to geographic mismatches and builder adaptation challenges. Dr. Dietz predicts that as capacity shifts to growth states and builders increase their comfort, off-site’s share could grow to 10% over the coming years.

Multifamily and the “Missing Middle”

Multifamily construction, encompassing everything from duplexes to high-rises, presented a mixed picture. While large metropolitan markets saw notable declines, smaller cities and exurban areas offset the drop with gains. The net result: stable or slightly increased multifamily starts nationwide, hovering around 400,000 units annually.

Dr. Dietz highlighted a persistent gap in “missing middle” housing—mid-density options like duplexes and quadplexes. Regulatory reforms and targeted investment could spur growth here, but built-for-sale multifamily (condos) has struggled post-recession, now making up just 5% of new multifamily starts.

The Housing Deficit: Are We Short, and What’s the Fix?

One of the most pressing questions is whether the U.S. faces a housing deficit. Most media cite a figure of 4 million units short, but NAHB’s estimate is more conservative: 1 to 1.5 million homes. This deficit, measured by vacancy rates and household formation trends, is a key driver of elevated prices and barriers to entry for first-time buyers.

Resolving the deficit will require sustained increases in single-family and multifamily production, regulatory easing, and innovations in density. Dr. Dietz estimates it will take most of the next decade—until about 2032—to close the gap.

Demographics and the Coming Shift: Less Household Formation Ahead

Looking beyond the immediate deficit, long-term demographic trends suggest that household formation will decline by as much as 25% come the mid-2030s. The millennial cohort is currently driving demand, but smaller generations—Gen Z and Gen Alpha—will reduce entry-level demand. This means the industry will pivot toward more remodeling and tear-downs, with the aging U.S. housing stock requiring significant reinvestment.

With fewer new households, remodeling will make up over 50% of construction activity, fueled by home equity, an aging population, and the desire to modify existing homes for aging in place.

The Regulatory Challenge: The Path to More Housing

Perhaps the deepest constraint to boosting supply is regulatory—zoning, permitting, impact fees, and land subdivision rules. Dr. Dietz argued that real change will require bold action, potentially at the federal level, to incentivize or even mandate more pro-supply policies.

Measures like allowing lot subdivision, reducing upfront regulatory costs, and linking community development funding to active improvements in building policy are among the ideas that could move the needle. The challenge is formidable, especially in states like California, where resistance to new development remains institutionalized.

2026 and Beyond: Predictions and Possibilities

For 2026, Dr. Dietz expects a modest recovery in single-family starts and stable multifamily production. Continued interest rate easing, bigger income tax refunds, and robust home equity should buoy the remodeling market, solidifying its outsized share of construction activity.

Looking further ahead, townhouse construction could claim 25% of the single-family market, and the dominance of national builders may level off as the industry adapts to more complex demand and tear-down opportunities.

Conclusion: Building Toward Solutions

The insights shared by Dr. Robert Dietz underscore a housing market at the crossroads of demographic shifts, regulatory debates, technological change, and policy uncertainty. The path forward requires coordinated action among builders, lenders, policymakers, and community advocates.

As the U.S. strives to close its housing deficit, meet new demand, and adapt to changing household sizes and preferences, a renewed emphasis on flexibility, efficiency, and regulatory reform is essential. With persistent effort and collaboration, industry leaders can work toward a future where the American Dream of homeownership—and affordable, quality housing for all—is within reach.

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