There are no shortage of challenges facing the housing market in 2025. Little has changed with the factors that have made buying a home more difficult since the pandemic.
The inventory of homes for sale remains tight, keeping upward pressure on home prices. Lot development remains slow, keeping new construction from acting as the antidote for tight inventory. And, after several years of more stable pricing, construction costs seem likely to escalate at a more rapid pace because of both market conditions and tariffs.
It is the latter that is causing uncertainty for the residential supply chain and homebuilders. The gestation period for building a new home is three or four times as long as it takes to purchase an existing home. Builders therefore must anticipate where construction costs will be for as long as one year to effectively build homes and turn a profit. When they cannot be sure about where costs will be in 60 days, as is the case today, homebuilding becomes more challenging. While that may seem like a builder’s problem, the reality is that builder’s problems become the homebuyer’s problem too.
“Costs are definitely higher than anyone in the industry would like to see right now. Some materials prices have come down since the pandemic, but many have stayed where they are and may increase because of the tariffs,” says Jason Corna, vice president, Residential Division for A. Richard Kacin Inc.
“We are anticipating a four to six percent increase in the overall price of a house over the next 12 months,” says Jack Pellis, owner of Pellis Construction. “If the average price of a new home nationally is $422,000, you’re looking at a $17,000 to $25,000 increase on that number. That’s significant. That number only grows if you’re building large custom homes which we do.”
There is little in the way of cost relief for builders or home buyers on the horizon. The push higher in construction costs comes from multiple factors, few of which are related to another. The persistent imbalance in supply and demand pushes escalation in material costs higher each year, but the impact of the skilled labor shortage is even more inflationary. The cost of new lot development is also escalating quickly, adding to the price of a new home before the first nail is driven. When you add to those factors the prospect of tariffs that would dramatically disrupt the supply chain, it is hard to see any outcome but higher prices.
While the market ultimately determines the price of a new home, there are three major factors that drive the price of new construction. The first is the cost of the lot that is prepared for the home to be built. The largest factor is the combined cost of the materials, products, and labor for the construction of the building. Finally, there is a margin on top of those hard costs for the builder’s overhead and profit. Unfortunately, the outlook for all three of these in 2025 is higher rather than lower.
Pressures on Lot Development
The cost of a home begins with the land that lies beneath it. This is true of existing homes to a degree – the implied cost of a lot in Fox Chapel or Upper St. Clair is higher than in West Mifflin or Bellevue, for example – but land costs have an immediate impact on costs for new home construction. There are a number of factors that have escalated the cost of acquiring and preparing it for a finished construction lot over the past two decades.
Corna notes that the one factor pushing development costs higher, which cannot be improved by better processes, is the price of land. With each new community that is developed, there is less buildable land available in metro Pittsburgh; moreover, competition from natural gas producers and commercial developers makes the buildable land scarcer for new home communities. Residential developers in Western PA have long since moved on from “Pittsburgh flat” properties to working with topography that yields fewer buildable lots and much more site work to prepare. Each new lot costs considerably more to prepare than it did just a decade ago.
New residential development has also been under pressure from financial regulations that followed the mortgage crisis in 2008. The Dodd Frank Act of 2010 meant to reign in the abuses of major Wall Street investment banks and mortgage lenders that caused the housing bubble and the collapse that followed. Some of the regulations that fell out of Dodd Frank helped keep lenders from overextending, which ensured that there were guard rails against the more aggressive lending that caused the crisis. But many of the regulations also hamstrung lenders, especially the regional banks that are the backbone of the U.S. mortgage market. Those regulations also added staff, and unnecessary costs of compliance, that added percentage points to mortgage rates.
Residential development is financed as a commercial loan, even though the resultant lots will have a home mortgage. Dodd Frank also added regulations on reserves and borrower’s equity for commercial loans that made residential development more difficult to finance. Borrowers that owned land were required to base the equity value of that land on its purchase price, rather than the current market price. That penalized long-term landowners, which saw the appreciation of the property eliminated as part of the financing deal. The higher equity requirements reduced the rate of return on the investment made on the development. None of these regulations reduced the inherent risk of development, but the return on that risk taken was significantly reduced. In a market like Pittsburgh, which was served to a high degree by older, more conservative developers, the reduced return pushed firms to stop pursuing new projects.
The combination of less land and fewer developers exacerbated the shortage of lots that existed before the mortgage crisis occurred.
As difficult as the tighter financial regulations, most of which are still in place, have been for residential development, they pale in comparison to the entitlement and environmental challenges that weigh on development.
“Development costs continue to be increasing through new regulations on stormwater conditions, how we need to treat the detention ponds, delays in approvals, increases in engineering costs, and other soft costs,” explains Paul Scarmazzi, CEO of Scarmazzi Homes. “Land costs have increased due to increased competition for land. The average home selling price is five times what the lot costs are. That’s a big multiplier. It’s simple math. The underlying land costs are increasing, which drives home costs.”
Pellis says that Pellis Construction has two development projects in the process for the first time in a few years. He sees some increased costs that relate to changes in the market since the pandemic but explains that the higher regulatory burden results in lower lot yields.
“The problem in land development is regulations,” Pellis says. “The stormwater management requirements and the Clean Water Act are burdensome. You buy an expensive piece of land and allocate space for your pond, but now you must allocate space for rain gardens and other on-lot controls to manage stormwater. You lose valuable land to stormwater management. We want to be responsible, but we need common sense practices. Compliance just keeps getting more difficult.”
Builders also expressed frustration with the time needed to get the necessary approvals from the various state and local government departments, even when everything submitted conforms with the codes and regulations. The entitlement process seems to not understand the value of time in residential construction.
“If you can turn a development in a reasonable amount of time you can forecast your costs pretty well, but it takes so long to get through the majority of approvals these days,” says Corna. “It’s hard to be as accurate forecasting your costs as you would like to be.”
Uncertainty about costs leads to higher prices. When developers or builders are unsure about the time it will take to get to the market, or the number of lots that will finally be approved, the risk of development grows. In business, prices rise or fall as the perception of risk rises or falls. In the final analysis, the perception of risk for residential development has risen to the point that developers are choosing not to develop lots for new homes. That means the lots that are developed will cost more.
Pressures on Home Building
While the headlines are focused on how tariffs may impact prices, the marketplace continues to be the driver of higher home prices. Supply chain disruptions lingered long after the pandemic ended – some materials were affected through 2023 – but the price of new construction continued to escalate faster than material inflation up to this date. Setting aside supply chain issues, the long-term upward pressure on home construction prices has come from market imbalances. Too many people are chasing too few new homes for sale.
Demographic shifts have hit construction especially hard, leaving the homebuilding industry with fewer skilled workers than are needed to build more homes. The jump in mortgage rates is keeping many homeowners with low mortgage payments in their current home. And a shift in attitude is limiting the mobility of homeowners compared to previous decades.
A March 2025 survey of homeowners aged 18 to 65 found that Baby Boomers were the least likely to sell their house. According to Redfin, just under 43 percent of Baby Boomers said they would never sell their home. Boomer homeowners cited satisfaction with their home and the lack of mortgage debt as the two main reasons for staying put.
Coming into 2025, most builders saw traffic and contract activity slowing slightly and anticipated that the prices of materials and building products would increase only slightly.
“I raise prices in January, and I have to evaluate again in April. We were expecting no big increases originally,” Jeff Costa, CEO of Costa Homebuilders said.
“Price increases for this year were back to those modest pre-COVID levels. We can’t guarantee those would be the only price increases because of the tariffs, but the rate of increase has flattened out,” said Rick Hangliter, regional manager for Gunton Corporation, the largest distributor of Pella Windows and Doors.
“In general, what we saw coming to this year was the typical two-to-five percent increase on most items. Lumber fluctuates up and down but it hasn’t been of concern of late,” says Corna. “That was the biggest problem during the pandemic.”
“Pricing for drywall and insulation, the two major residential products we provide, should be flat this year. Those are both back at full supply,” says Chris Singleton, a regional sales manager for L&W Supply, a national distributor of interior building products. “That has only been true for insulation within the past few months.
Scarmazzi and Pellis echoed the expectations for a low single-digit level of escalation for prices. Tariffs, or the potential for tariffs, were an additional variable that builders and suppliers had an eye on as the administrations changed in January.
Tariffs are still mostly an uncertainty, but even before the on-again-off-again levies of the Trump administration, the threat of tariffs pushed significant cuts in supply in Canada. Beginning at the time of the U.S. elections, some of western Canada’s largest sawmills announced curtailments of lumber production. Demand for lumber slowed throughout 2024 as housing starts declined in the U.S. and Canada. Faced with the possibility that export duties would more than double in 2025, Canadian sawmills, which produce 70 percent of the lumber used in the U.S., announced cuts that are estimated to total 3.1 billion board feet. That is enough to build roughly 220,000 new homes.
The trimmed supply was already pushing prices higher as 2025 started. At $534 per 1,000 board feet on December 31, the price of lumber was $115 or 27 percent higher than its July 2024 low. By the end of February 2025, a week before the tariffs were implemented, lumber was $100 per 1,000 board feet higher.
The tariffs that have been announced thus far, to the extent that they remain in place, will have broad impact that will vary throughout the supply chain. Tariffs on metals will increase the cost of manufactured goods like windows, doors, fixtures, and appliances that are installed in a new home. Likewise, finished products that are imported will see a boost in price that is more than expected. Of course, there is also likely to be some amount of piling on effect if the tariffs are more than a short-term negotiating ploy. As happened during the pandemic, suppliers of goods unaffected by tariffs will use them as an excuse to raise prices. Some of the latter is happening already with lumber and drywall products.
“I monitor all of the pricing letters, and the lumber and drywall are the only two with big increases so far,” observes Costa. “Unfortunately, at this time the lumber companies are behaving as though there are tariffs, whether they are active or not. 84 Lumber is saying that anything coming in right now is priced as though there is a tariff. What they are doing is blending the price between new and the lumber that is on the ground.”
Drywall is a product that should be unaffected by tariffs, although there are pricing pressures creating inflation. Singleton notes that drywall is almost entirely produced in the U.S., including at three plants located on the Ohio River within 50 miles of Downtown Pittsburgh. Some changes in the dynamics of the raw material used to make drywall – gypsum – are more likely to put upward pressure on wallboard than tariffs.
“About 20 years ago, manufacturers shifted the source of gypsum from mined gypsum to waste gypsum from coal-fired power plants. That’s why the plants USG, National Gypsum, and Certainteed built were in Beaver County and Moundsville, WV. They were close to power plants,” he explains. “With coal-fired plants shutting down, manufacturers have to shift back to shipping in mined gypsum.
Most of that is coming from Nova Scotia or Europe, so there are
some tariff implications and increased raw material costs because of the shipping.”
Manufacturers have reacted by announcing price hikes of 15-to-20 percent, but the softness of the housing market makes it unlikely that those increases will stick. Builders are expected to push back.
“It’s not like sales are bursting at the seams. My phone is not ringing off the hook,” says Costa. “When inflation was running rampant during COVID, sales were also going up. Right now, sales are not slow, but they are not booming.”
The unexpected prospect of higher costs is a monkey wrench in the works that builders do not welcome. With home price appreciation at record high levels, home builders have seen the pool of prospective buyers shrink, even though demand for homes is relatively high. Since the pandemic, builders have worked to further refine their estimating to avoid surprises for their clients and maintain profit levels that will sustain their businesses. In an uncertain market, even those that work at keeping lines of communication open with suppliers cannot see around the corner to what is coming.
“Everybody’s on edge. Typically, when we speak to our suppliers they’re able to forecast how things are going to be this quarter, next quarter, and throughout the year. They are at a loss right now to accurately forecast prices,” says Corna. “I think you’ll see some prices go up on things just because they can, whether they are affected by tariffs or not. I can guarantee you that nothing will come down in price in the short term.”
“Our framing package is primarily from Canada and tariffs are going to have an adverse effect on that,” says Pellis. “What I’m told by my main lumber supplier is that there is an abundant supply of lumber on the ground, so we won’t see an immediate increase in the price of our lumber. If that holds true that’s great.”
The consensus in the marketplace is that the tariffs will be temporary, used to extract concessions or to create the perception that the U.S. has gained an advantage. Nonetheless, no one is comfortable that trade frictions will not affect business.
“The problem is that we’re seeing cumulative inflation from the past five years. There’s enough aluminum wood in our products that if there’s a 25 percent tariff from Canada it will have an impact,” notes Hangliter. “We’re not running around telling our customers increases are coming because it’s on again and off again. We hope the tariff policy becomes stable like pricing has.”
“I was able to buy a train car of OSB [oriented strand board] and ZIP panel sheathing to lock in about one-third of what was possible to lock in,” says Costa. “It’s a unique market and I’m not sure what’s going to happen.”
“Maybe the tariffs will just be a negotiating tool, and we won’t realize this increase in lumber costs. Short-term we should be okay, and we are bullish on this year. We have a high backlog, and we have some projects coming,” says Pellis.
“The problem for a custom builder is that our home is priced individually. Our price is established four months before we start construction and construction takes up to another year,” explains Corna. “We like to see stability in the marketplace in any 14-to-18-month period.”
“We are a portfolio builder so I can tell you within a couple of dollars how much our six or seven models will cost. We work hard at operational excellence to manage costs. We have to or we wouldn’t be able to have our position in the market” says Scarmazzi. “I’m not sure where it’s all going to end. The tariffs are the wild card for sure.” NH
