Understanding the U.S. Residential Housing Cycle: A Detailed Analysis of Its Downturn and Regional Impacts

EPB Research

Introduction to the Residential Housing Cycle [00:00:00]

The residential construction cycle is a critical component of the U.S. business cycle, second only to manufacturing.

• It is highly cyclical and extremely sensitive to changes in monetary policy.
• This sector often acts as the first major indicator of an economic boom or bust.
• Understanding that residential housing moves in a sequence, much like the overall business cycle, is crucial.
  • Residential construction activity does not directly translate to immediate changes in home prices.
  • Home prices typically lag other indicators, similar to how inflation lags in the broader economic cycle.
  • A downturn in residential construction does not immediately cause home prices to drop.

The Sequential Downturn [00:00:48]

The video outlines a clear sequence for the residential construction cycle, which begins with monetary policy and ends with home prices.

• This cycle follows a predictable order of impact:
  • Monetary Policy
  • Building Permits
  • Construction Activity
  • Profit Margins
  • Employment
  • Home Prices

Monetary Policy [00:00:48]

Tightening monetary policy is the initial catalyst for a downturn in the residential cycle.

• Real True Money Supply (TMS-2), an inflation-adjusted measure, is used as an indicator.
  • Peak monetary easing occurred in February 2021.
  • Major tightening began in mid to late 2022.
• The stock of excess money relative to the pre-COVID trend has been a factor in prolonging the current down cycle.
• The virtual elimination of this excess money is expected to accelerate the downward momentum.

  

Building Permits & Sales Volumes [00:01:32]

Following monetary tightening, sales volumes and applications for new building permits are the first to react.

• Building permits peaked in December 2021, three quarters after the peak in easy monetary policy (February 2021).
• The lingering excess money initially led to a slower decline, but building permits continue their downward trend.
• As monetary policy remains tight, sales volumes will likely stay weak, and new permit applications will continue to fall.

  

Construction Activity (Housing Units Under Construction) [00:02:04]

While building permits can change quickly, the number of housing units under construction takes longer to adjust as existing projects are completed.

• Housing units under construction peaked in October 2022.
  • This peak occurred after the peak in monetary easing (Feb 2021) and building permits (Dec 2021), illustrating the sequential lag.
• Despite the current level of activity still being somewhat elevated (1.4 million units), the downward momentum is significant.
• Continued tight monetary policy, weak sales, and declining permits suggest a further slide in construction units.

  

Construction Employment [00:02:39]

Residential construction employment is categorized into building employment (new construction, general remodeling) and trade contractor employment (subcontractors like plumbers, electricians).

• Neither category has seen a sharp drop yet.
• Subcontractor employment peaked in late 2024, while building employment has been more resilient.

Homebuilder Profit Margins [00:03:04]

Profit margins have played a significant role in sustaining employment levels despite a decline in production.

• Profit margins for the eight largest homebuilders reached historical highs post-pandemic, hitting 20% in 2022.
• A 600-basis-point compression brought margins down to 14%.
• This compression, which would normally lead to layoffs, still left companies in a more profitable position than pre-pandemic due to the exceptionally high starting point.
• Margins are now accelerating downwards and are expected to continue this trend.
• Tariffs present a wild card; if increased tariff pressure cannot be passed through to consumers, margin erosion could intensify, potentially accelerating job losses.

  

Home Price Trends & Regional Disparities [00:04:12]

Home prices are the last element in the residential construction cycle to react to changes.

• This lag is similar to inflation in the broader business cycle.
• The sequence culminates in home prices suffering after employment begins to fall.

National Home Price Index [00:04:35]

National home prices are beginning to show declines.

• On a 3-month annualized basis, national home prices are dropping by 1.5%.
• However, national averages do not capture the full, highly regionalized story of home price changes.

Regional Inventory Differences by State [00:04:47]

The current cycle exhibits extreme regional differences in housing inventory.

• A map comparing active housing inventory in 2025 versus the 2018/2019 average highlights these disparities.
  • Orange areas indicate higher inventory levels, making prices more susceptible to falling.
  • Green areas indicate very low inventory, likely supporting price increases.
• States with the biggest increase in active inventory (making them more vulnerable to price declines) include:
  1. Colorado
  2. Texas
  3. Washington
  4. Florida
  5. Utah
  6. Arizona
  7. Nevada
• States with the biggest decrease in active inventory (suggesting continued price pressure) include:
  1. Connecticut
  2. Illinois
  3. New Jersey
  4. Vermont
  5. Rhode Island
  6. Northeast, Midwest

     

Florida Metro Active Inventory Analysis [00:05:34]

Even within states, disparities are significant at the metro level.

• Florida's overall inventory is 30% higher than pre-pandemic levels in 2025, indicating slower home sales.
• However, specific metro regions like Key West, Miami, Fort Lauderdale, West Palm Beach, and Naples still have similar or lower inventory compared to pre-COVID.
• The inventory surge in Florida is concentrated on the west coast, particularly in areas like Punta Gorda, Panama City, and Fort Myers.

  

California Metro Active Inventory Analysis [00:06:08]

California, as another example, shows varied metro-level performance.

• Statewide inventory is 4% lower than pre-pandemic levels.
• However, there are significant differences across its metro regions, with some experiencing increases and others decreases.

  

City-Level Home Price Performance (Relative HPI) [00:06:16]

Analyzing relative Home Price Index (HPI) compared to the national average provides further insights into city performance.

• Underperforming Cities (dragging down the national average):
  1. Dallas
  2. Denver
  3. San Francisco
• Outperforming Cities:
  1. Charlotte: Strong outperformer since early COVID.
  2. Miami: Experienced an explosion from 2021-2024 but has recently begun to mildly underperform.
  3. New York: A laggard during the pandemic, now outperforming due to extreme inventory issues.

     

     

Overall Cycle Status and Key Takeaways [00:07:13]

The residential housing cycle consistently follows a sequence, which is currently in a solid downturn.

• While the full sequence takes time to evolve, and this cycle has been notably extreme in its characteristics, the final phase of home price declines is now appearing.
• These price declines are highly varied across states and metro areas.
• States with extensive new building activity are experiencing high inventory, leading to homes sitting longer on the market.
• Conversely, many regions still face tight inventory, contributing to elevated prices.
• The most problematic states concerning inventory include Florida, Texas, Colorado, Washington, Arizona, Utah, and Nevada.
• Tight inventory and upward price pressure persist in the Northeast and Midwest.
• Key takeaway: It is crucial to analyze the entire residential housing cycle as a comprehensive process, rather than isolating individual components like home prices, to form a complete and accurate understanding.