Economic uncertainty driven by trade policy, persistent affordability challenges and elevated interest rates continue to weigh on the housing market, even as parts of the broader economy remain resilient, according to a national housing economist who addressed local builders this week.
Fan-Yu Kuo, a principal economist with the National Association of Home Builders, delivered a wide-ranging economic update during the January membership meeting of the Home Builders Association of Greater Chattanooga Jan. 13 at the Ultra Club. Her presentation drew on newly released national economic data and NAHB research to outline the forces shaping housing demand, construction activity and affordability at both the national and local levels.
Kuo, whose work focuses on macroeconomics, housing trends and forecasting, told builders that while the U.S. economy has avoided a recession, the environment remains challenging for housing due to policy uncertainty, labor market softening and costs that remain significantly higher than before the pandemic.
Uncertainty weighs on industry
Kuo opened her remarks by pointing to elevated economic uncertainty, which she said peaked in April 2025 following the announcement of reciprocal tariffs and remains historically high despite some recent easing.
“We still have unresolved tariff issues and ongoing trade negotiations with our trading partners,” she said, noting uncertainty affects both business investment and consumer decisions.
For businesses, uncertainty surrounding interest rates, tariffs and regulation often leads to pauses in hiring and capital spending. For housing, Kuo said, it encourages would-be buyers to delay purchases while they wait for lower mortgage rates or more favorable prices. Builders, meanwhile, might hold back on new projects due to concerns about rising costs tied to tariffs and other policy risks.
“The housing market can slow down simply because of tariffs,” she said.
That uncertainty is reflected in consumer sentiment. Kuo said the consumer confidence index fell in December to its lowest level since April 2025, coinciding with the height of trade tensions. Consumer confidence declined throughout much of 2025 as households remained concerned about inflation, tariffs and the job market.
While overall consumer spending has remained relatively healthy, Kuo said households are becoming more cautious and deliberate with their spending decisions.
“Consumers are still spending, but they’re thinking harder about every dollar they spend,” she said.
Economic growth uneven
Despite weakening confidence, Kuo said consumer spending has helped keep the broader economy resilient. Gross domestic product growth, however, has been volatile.
She explained that GDP contracted in the first quarter of 2025 as businesses rushed to import inventory ahead of tariffs, driving imports sharply higher. Growth rebounded in the second quarter as imports declined, then surged in the third quarter to its strongest level in nearly two years, supported by strong consumer spending, higher exports and increased government spending.
Kuo cautioned that the momentum might not be sustained, pointing to the government shutdown in the fourth quarter of 2025 and expected pullbacks in consumer spending.
Beneath the headline numbers, she said, the economy shows a growing divergence in household experiences.
“Stronger consumer spending is mainly driven by higher-income households,” Kuo said. “Middle- and lower-income households have pulled back because of inflation.”
That divergence has led to what she described as a “two-speed economy,” where wealthier households continue to spend confidently while others struggle with higher prices and tighter budgets.
Looking ahead, Kuo said NAHB forecasts economic growth of about 2.3% in 2026, avoiding a recession but signaling slower demand and increased consumer caution.
Housing costs still a concern
Kuo discussed newly released inflation data, noting that overall inflation measured 2.7% in December, unchanged from November. Shelter inflation (the rising cost of housing services, a major component of the Consumer Price Index) rose modestly to 3.2%.
She cautioned, however, that recent data might understate inflation due to disruptions in government data collection tied to shutdowns. In some months, partial data collection resulted in artificially low reported growth, particularly for housing costs.
“Housing is a major inflation driver,:” Kuo said, noting that about 60% of overall inflation in 2024 was attributable to housing.
While inflation has fallen significantly from its 2022 peak, she said tariffs contributed to a rebound after inflation briefly dipped to 2.3% earlier in 2025. NAHB expects inflation to peak again in the first quarter of this year as businesses enter a new inventory cycle.
Labor pressure prompts cuts
Kuo said the weakening labor market was a major reason the Federal Reserve began cutting interest rates last year.
Job openings peaked in 2022 and have since fallen back toward pre-pandemic levels. In 2025, the U.S. added just 584,000 jobs, the weakest annual total since 2003 outside of recession years, she said.
Recent job gains have been concentrated largely in health care and social assistance, while hiring in many other sectors has stalled. The unemployment rate stood at 4.4% in December, near a four-year high.
“We now have more people looking for jobs than job openings,” Kuo said. “This is a clear warning sign for the Federal Reserve.”
The Fed cut rates three times in 2025, bringing the federal funds rate down to a top rate of 3.75%. Kuo said policymakers are now weighing whether to continue prioritizing labor market support or refocus on inflation, which remains elevated.
NAHB expects three additional rate cuts this year, potentially bringing the top federal funds rate close to 3%.
Mortgage rates remain a barrier
Following the Fed’s rate cuts, mortgage rates began to trend downward late last year. Kuo said rates fell to 6.15% in the final week of 2025, the lowest level of the year and the lowest since October 2024.
Even modest declines have had an immediate impact on mortgage applications and refinancing activity, she said, highlighting the housing market’s sensitivity to interest rates.
However, mortgage rates remain well above the 3% and 4% levels many homeowners secured during the pandemic, contributing to what Kuo described as the “lock-in effect.”
More than 80% of homeowners have mortgage rates below 6%, she said, making them reluctant to sell and take on higher monthly payments.
“If you have a 3.5% mortgage and you’re looking at 6%, it’s almost double,” she said, adding that monthly payments can increase by more than $700. “So people stay put.”
That dynamic has kept existing-home inventory tight and placed upward pressure on prices. Kuo said the lock-in effect is unlikely to ease until mortgage rates fall below 6%.
Long-term demand
Despite weak home sales, Kuo said underlying fundamentals of the housing market remain healthy. Household balance sheets are relatively strong, and the share of income devoted to mortgage debt has remained stable, indicating that most homeowners can continue making payments.
Population growth, she said, is one of the strongest drivers of housing demand. Both Tennessee and the Chattanooga metropolitan area have outpaced national population growth in recent years.
“When demand grows faster than supply, prices go up,” Kuo said.
Nationally, home prices have increased about 50% since the start of the pandemic. In Tennessee, prices are up roughly 70%, and in the Chattanooga area, they’ve risen approximately 73% – among the highest increases in the country.
Those gains, combined with higher mortgage rates, have significantly eroded affordability, particularly for first-time buyers.
Homeownership levels lower
Kuo said affordability challenges have contributed to lower homeownership rates. The current national homeownership rate stands at about 65.3%, well below levels seen in the early 2000s.
She said NAHB views this level as a potential “new normal,” driven by affordability pressures and lower birth rates. While some easing might occur this year as inventory improves and mortgage rates decline modestly, a return to the roughly 69% homeownership rate seen during the mid-2000s housing boom is unlikely.
For builders, Kuo said the shifting market could create opportunities, particularly for new homes that can compete with existing homes through incentives that resale sellers cannot easily match.
Supply-side pressures
On the supply side, Kuo detailed challenges builders continue to face, including higher material costs, labor shortages and regulatory burdens.
Building material prices increased about 34% from pre-pandemic levels through 2024, excluding the effects of tariffs. While lumber prices have stabilized since 2023 and are closer to pre-pandemic levels, Kuo warned that relief might be temporary.
The U.S. imports about 30% of its lumber, much of it from Canada. While lumber was exempt from global reciprocal tariffs, anti-dumping tariffs (special import duties governments impose on foreign products sold below their “fair value”) on Canadian lumber were raised from 14% to 35% last year. At the same time, domestic sawmill production has remained flat.
“As construction picks up and demand for lumber increases, prices will likely jump again,” she said.
Labor shortages also remain a long-term concern for the housing industry, despite recent easing due to slower construction activity. About one in four construction workers are immigrants, and Kuo said tighter immigration policies could worsen labor shortages and push costs higher when construction rebounds.
Government regulation, she said, is another often-overlooked driver of housing costs. NAHB estimates that regulation accounts for roughly 25% of the price of a new home, or about $94,000 in 2021. That figure is up 44% from about $65,000 in 2011.
“If you’re adding nearly $100,000 in regulatory costs to a home, you’re pricing out first-time buyers and young families,” Kuo said.
Outlook varies by sector
Looking ahead, Kuo said higher home prices and mortgage rates are creating a relative bright spot for the multifamily market, as more households remain renters.
Multifamily housing starts peaked in 2022 before falling sharply due to high interest rates and a surge of supply. Kuo said the sector appears to have bottomed out and is entering a new cycle, with NAHB expecting growth in multifamily construction this year.
Single-family construction, by contrast, continues to face headwinds. Kuo said tariffs, labor shortages and higher financing and material costs contributed to a 7% decline in single-family housing starts in 2025.
More than half of NAHB builders surveyed reported price increases due to tariffs, which Kuo said add an estimated $10,000 or more to the cost of a typical single-family home.
Locally, she said single-family permits in Tennessee were down 6% last year, while permits in the Chattanooga area fell 18%, reflecting national trends.
Remodeling remains the strongest segment of the housing market, Kuo said. Remodeling activity has expanded for years as homeowners stay put and invest in improvements rather than moving. The remodeling share of the housing market has grown from about 30% in 2007 to 40% in 2024.
With an aging housing stock and an aging population, she said remodeling demand is likely to continue growing.
Transitional year ahead
In closing, Kuo said the economy is slowing but remains resilient, and the housing market is entering what she described as a transitional year.
Mortgage rates are expected to decline further, but not enough to fully resolve affordability challenges.
Inventory is improving, creating a more balanced market, but builders continue to face significant cost pressures from tariffs, labor shortages and regulation.
“The outlook varies by sector,” she said. “Multifamily is recovering, single-family is still under pressure and remodeling remains strong.”
She concluded by encouraging builders to remain attentive to shifting conditions as policy, rates and demand continue to evolve in the months ahead.