By Heather Stone, Senior Correspondent
U.S. home prices are expected to increase by 3.5% in 2025, marking the slowest annual growth rate in over a decade. This projection, based on a broad survey of housing analysts, reflects a housing market grappling with affordability issues, elevated mortgage rates, and newly imposed tariffs on key construction materials.
While lower mortgage rates were initially anticipated to provide some relief, recent policy decisions are reshaping the housing outlook. President Donald Trump has announced a significant increase in tariffs on steel and aluminum imports, doubling them to 50%. These tariffs are raising alarms across the construction and real estate sectors as they are expected to inflate building costs and slow the development of new homes, especially in the affordable housing segment.
Construction Costs on the Rise
Tariffs on steel and aluminum directly impact the cost of constructing homes. Industry estimates suggest that the increased tariffs could add approximately $10,900 to the cost of building a typical single-family house. Essential materials such as steel beams, aluminum siding, and roofing components are all becoming more expensive, which in turn inflates overall project costs.
Prices for steel and aluminum have already surged in response to the tariffs. For instance, aluminum premiums for U.S. buyers spiked sharply, while steel prices also recorded notable gains. These material cost increases are being passed down the supply chain, leading to more expensive homebuilding projects.
Impact on Housing Supply
The rise in construction costs is expected to hinder new home development. Nearly nine out of ten housing analysts surveyed indicated that the tariffs will likely reduce the number of homes built or force developers to construct smaller units to maintain profitability.
This challenge compounds existing problems in the housing market. Construction spending in the residential sector has declined for consecutive months, driven by reduced investment in single-family housing projects. Builders are already struggling with high borrowing costs and a surplus of unsold inventory, and the new tariffs are likely to exacerbate these difficulties.
Affordable housing projects are particularly vulnerable. Developers in this segment operate with tight margins, and even modest increases in material costs can derail planned projects. As a result, communities that are already facing housing shortages may see fewer new units coming online, further straining the market.
Mortgage Rates and Buyer Affordability
Although interest rate cuts from the Federal Reserve are anticipated later in the year, mortgage rates remain high. The current average rate for a 30-year fixed mortgage is near 7%, significantly above the record lows seen during the pandemic. This rise in rates has limited the purchasing power of potential homebuyers, particularly first-time buyers.
Affordability remains a critical concern. Fewer analysts now believe that conditions for first-time buyers will improve in the next year, with expectations for improvement dropping significantly from previous surveys. The combination of elevated home prices, increased mortgage rates, and higher construction costs has created a tough environment for entry-level buyers.
Broader Economic Concerns
The tariffs are also affecting broader economic sentiment. Business owners across the country have expressed concerns about the potential for supply chain disruptions due to trade policies. Many fear that the increased costs for raw materials will lead to higher prices for consumers and reduced competitiveness for U.S. products.
Beyond housing, the rise in construction material prices is expected to influence the home repair and renovation market. Higher costs for repairs can lead to increased home insurance premiums. Analysts forecast that home insurance rates could rise by as much as 11% by the end of 2025, adding to the financial strain on homeowners.
Looking Ahead
While a 3.5% increase in home prices suggests a cooling market compared to previous years, the combination of macroeconomic factors and policy decisions is creating a complex environment. The added burden of construction tariffs may lead to long-term shifts in how and where homes are built, and could alter the pace of housing development across the United States.
As market participants adapt to these evolving conditions, policymakers and industry leaders will need to consider strategies to support housing affordability and supply. Monitoring economic trends and adjusting policies accordingly will be crucial to ensuring a balanced and accessible housing market for all Americans.
