What's up with the housing market?

During what is normally the peak spring season for home sales, real estate signs may be spelling some trouble.

Existing US home sales fell by 5.9% in March from the prior month—the slowest pace since February 2009.¹ The drop in sales occurred despite a roughly 20% year-over-year increase in listings.¹ Relatively high interest rates—as well as high maintenance costs and economic worries (US GDP contracted in Q1 2025 for the first time since Q1 2022)—have parts of the housing industry in a state of flux. And global trade frictions may be making it harder for investors to read the room.

Despite the risks, the real estate sector has been on firmer ground than the broad market thus far this year. Here's a look at what homebuyers and real estate sector investors are negotiating.

Rates, tariffs shake housing foundation

While tariffs have dominated much of the financial news headlines in 2025, relatively high interest rates continue to be a primary factor for the housing and construction market.

Consider the Atlanta Federal Reserve’s Home Ownership Affordability Monitor—which is a monthly measure of the median-income household’s capacity to afford the median-priced home at the national, metro, and metro-county levels. It continues to hover near the most unaffordable levels in the history of this index.

The main factors contributing to the housing affordability dilemma: High prices and high interest rates.

Rates have come down a bit from the 2023 near-term highs. Yet the 30-year fixed mortgage rate remains close to 7%, as of May 7, 2025. While that’s nowhere close to mortgage rates from the 1980s and 1990s, it’s still well above that of the 2010s—when rates were extremely low for a prolonged period.

Federal Reserve Chair Powell recently noted that inflation may rise in the short term “in all probability” as “tariffs are inflationary.” That could mean the US central bank could keep rates higher for longer than previously anticipated. In fact, the Fed did not lower rates at the May FOMC meeting.

Tariffs are the latest variable to knocking at the housing market’s doorstep. Jordan Michaels, manager of the Fidelity^® Select Construction and Housing Portfolio (), has been keeping a close eye on lumber, steel, and other key construction materials.

“I think tariffs could add meaningfully to housing and construction costs, further exacerbating affordability for homebuyers and margin pressures for housing and construction companies,” Michaels says. “Tariff implications are generally negative for the housing market, as any inflation they cause could delay rate cuts or even lead to rate hikes.”

Taking shelter in home improvement stocks

What might all this mean for investors in the housing and construction market? There could be some bifurcation within the real estate sector.

“Obviously, tariffs can have a greater impact on companies that have more foreign sourcing exposure and less pricing power,” Michaels points out. “I’ve been underweight homebuilders, mainly due to homebuyer affordability, relatively high borrowing rates, high inventories (which can hurt these companies' pricing power), and margin pressures due to price/volume headwinds—some of which are tariff-related. Plus, valuations have generally been unattractive across the group.”

With that said, the recent tariff-induced market volatility may have improved some of those valuations. Year to date, the S&P Homebuilders Select Industry Index is down 7%.

On the flip side, home improvement stocks may have a sturdier foundation—even considering the risks to the broader real estate sector.

“I’m more positive on home improvement retailers than homebuilders," Michaels says. "Category spending for home improvement retailers has reverted back to or just below long-term trends." 

Other positives for this group, he says, include an aging housing stock, higher utilization of housing stock/depreciation during the pandemic, work-from-home/hybrid models, record home prices and home equity, more homeowners aging in place, increased prevalence of extreme weather that can necessitate more repair activity, and housing turnover that’s been historically depressed. "I’m seeing evidence of these trends in home improvement retailers finally returning to positive same-store sales growth during Q4," Michaels notes.

Another factor to consider is the discrepancy between long-term and short-term rates. While mortgage rates haven’t come down as much as longer-term rates (which remain relatively high), short-term rates have come down a bit more. 

"Short-term rates coming down somewhat impacts floating-rate debt, including home equity lines of credit (HELOCs), where I’ve seen evidence of an uptick in lending,” according to Michaels. "That could be conducive to a relatively more positive environment for home improvement businesses."

With all that said, home improvement companies (along with homebuilders) face tariff headwinds. “For example, the 2 largest home improvement retailers—Home Depot () and Lowe’s ()—source a significant amount of goods from China, especially appliances,” Michaels notes.

The home improvement retail and homebuilding industries also have high exposure to Canada and Mexico (where trade frictions have grown), given their reliance on Canadian softwood lumber and Mexican gypsum that’s used for drywall.

“As of the most recent reporting period, my fund has a large overweight in Lowe’s, given faster earnings growth within the industry and operational improvements, an underweight in Home Depot, and an overweight in Floor & Decor ()—which I think is a relative beneficiary of tariffs due to having had leading prices, scale, and sourcing advantages,” Michaels says.

Of course, tariff uncertainty remains, particularly if and how much higher costs can be passed on to consumers by these companies—and how that might impact demand. All while broader trends in housing continue to loom large in the real estate sector.