It would be impossible to list the 70+ executive orders signed and published so far under the new U.S. administration. Some of these edicts are clear and enforceable, while some have been challenged. We have discussed at length the potential impact of 25% blanket tariffs on imports of Canadian forest products. Collectively, however, this torrent of change has created uncertainty, slowing business decision-making—and, therefore, investment. We have seen this paralysis in the lumber markets, with buyers and sellers unsure of how to prepare for tariffs, and confusion leading to inaction. The same is true at the individual level, with mass layoffs in the public sector (by some accounts 200,000 people have been fired and another 75,000 opted to take a buyout offer—which may or may not be legal). Workplaces that see mass firings also tend to freeze up, slowing workflow as employees contemplate their future. Employment data will be key to watch over the next few months. Immigration/deportation will be important factors impacting construction, employment and various other aspects of the economy.
Recessions can be caused by shocks to the system on the supply or the demand side. There is no question that the executive orders to date have shocked the systems of both government and international trade; this has apparently been intentional. The question is whether or not supply, demand and labour can respond appropriately with minimal disruption. Over time, clearly, they can in an economy as dynamic and entrepreneurial as that of the US; in the short-term, however, there is a risk that uncertainty holds back both business investment and consumer spending. These two indicators will be critical for the performance of the companies in our coverage universe in 2025 and beyond. Some cracks are already showing, but it is early days.
High interest rates have held back both housing demand and housing supply. If tariffs are indeed implemented, prices should rise and rates will not fall (unless a recession ensues). The latest dot plot indicates expectations for two cuts in 2025, and our companies have uniformly indicated flat expectations for new-home construction this year. While many of our companies would benefit from higher operating rates for their US asset bases, they express concern about second-order effects of new federal policies on employment, consumption and confidence. Risk remains underpriced, and the stability of the economy is undervalued and its robustness perhaps overestimated. Moving fast and breaking things can have lasting negative impacts.
US Housing Starts Exited 2024 With a Roar, Start 2025 with a Whimper
U.S. housing starts exited 2024 with a roar (at least for the seasonally adjusted number), but they have started 2025 with a whimper. January’s adjusted starts of just 1.37MM units were down 10% m/m (-1% y/y) as a combination of foul weather, rising mortgage rates and general macroeconomic/geopolitical instability put a damper on housing activity. Of January’s adjusted total, single-family starts accounted for 993,000 units (singles had crested the one-million mark in the prior two months), while multifamily activity remained subdued at just 373,000. On an unadjusted basis, January starts of 96,000 marked the lowest monthly total since December 2022 and were off by 11% m/m and 3% y/y. Looking at adjusted permitting data for January, total permits and single-family permits were near unchanged m/m at 1.48MM and 996,000, respectively.
Home sales data were equally discouraging for January, with adjusted existing home sales declining 5% m/m to 4.1MM (up 2% y/y). With expectations for fewer rate cuts likely resulting in 30-year mortgage rates remaining above 6% in the near-term (the 30- year rate sits at 6.85% today), existing-home sales may struggle to rebound to the 5– 6MM clip many pundits had previously expected. This means the resultant recovery in R&R demand may be pushed out until 2026. Home Depot echoed this sentiment on its recent earnings call when it forecast that comparable sales will increase by just 1% y/y in 2026 (analysts had previously forecast a 1.65% increase). Home Depot sales turned positive (+0.8%) last quarter, arresting a run of eight consecutive negative quarters.
Finally, new home sales were released on February 26 and followed a similar trend to starts and existing sales. Adjusted new home sales slumped by ~11% m/m to 657,000 last month, while adjusted new home inventory increased by one month to 9 months (actual new home inventory has been steady around 490,000 since October).
There has been a lot of ink spilled discussing the potential impacts of changes to immigration policy on the U.S. housing market; however, we suspect that labour shortages may be less of a constraint for U.S. housing in 2025 because affordability challenges continue to stymie building activity and have left the entire housing market stuck in first gear.
With housing demand/homebuilding activity expected to recover through the end of the decade, labour may become a bigger constraint/concern as time progresses, and a meaningful tightening of construction labour supply could put a lower ceiling on U.S. housing starts in this cycle (1.6–1.7MM units?) versus previous cycles (i.e., we view a return to the 2MM+ peak experienced before the GFC as highly unlikely).