Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Home Builders Market
Transcript
- Lucas: So the latest real GDP number came in at 2.1 percent annualized for the first quarter of 2026. That's up from just half a percent in the previous quarter. But here's the problem—inflation isn't coming down as fast as anyone hoped. Core CPI is still hovering around 3.3 percent if you look at the June print. Luna: Right, so we're in that uncomfortable zone—growth picking up but prices still sticky. That's the stagflation headache, minus the contraction. Lucas: Exactly. And one industry that's feeling that tension acutely is home builders. They're caught between higher input costs—lumber, concrete, labor—and buyers who are getting squeezed by mortgage rates that haven't dropped as much as expected. The 30-year fixed is still north of 6.5 percent. Luna: And we just saw jobless claims drop to 187,000—that's incredibly low. So the labor market is tight, which means builders can't find workers either. Lucas: Right. The National Association of Home Builders survey shows that over 60 percent of builders are reporting labor shortages. And with average hourly earnings at $37.60, it's not a cost problem that's going away. So what do they do? They adapt. Luna: I've been reading about some builders cutting square footage. They're moving away from that McMansion model and focusing on smaller, more efficient homes. Lucas: Yeah, the median new home size has dropped by about 7 percent since 2020. And they're also swapping out expensive materials—think engineered wood instead of solid hardwood, or vinyl siding instead of fiber cement. The goal is to keep the sticker price under a certain threshold. Luna: But even that threshold is getting harder to hit. Lumber prices have been volatile—they spiked again in May after sawmills cut production. And concrete? That's up maybe 12 percent year over year. Lucas: It's a margin squeeze. The average gross margin for public home builders was around 23 percent in 2025. This year it's probably closer to 19 or 20. So they're getting creative on the financing side too. More builders are offering rate buydowns—paying points to lower the buyer's mortgage rate for the first few years. Luna: That's a big shift. It used to be the domain of desperate sellers. Now it's standard. But it eats into their profit. Lucas: Exactly. And the thing is, demand isn't vanishing. Millennials are still forming households, and there's a structural shortage of housing in many markets. But the affordability gap is real. The median new home price is around $425,000, and with mortgage rates where they are, that's a $2,800 monthly payment. That prices out a lot of people. Luna: So we're seeing a bifurcation. Builders are concentrating on the move-up buyer, not the first-time buyer. And that's a problem because first-time buyers are the ones who drive the market cycle. Lucas: Right. Some builders are trying to tap into that segment by building attached homes—townhouses, duplexes—which cost less per square foot. D.R. Horton, for instance, has been putting up more townhome communities. They're called their 'Express Homes' line, and they start around $250,000. Luna: That's still a lot in many markets, but it's a step. The challenge is land costs. You can't just build cheap if the lot itself is expensive. And with inflation in land prices, that's another headwind. Lucas: So the whole ecosystem is under pressure. And then you add in the regulatory side—impact fees, zoning restrictions. That can add $50,000 or more per home in some states. It's no wonder starts are only running at about 1.4 million annualized, well below the historical average. Luna: But let's talk about the bigger picture. The Fed is still watching inflation—core PCE is above 2.6 percent. So they're not cutting rates anytime soon. What does that mean for builders looking ahead to 2027? Lucas: They're going to have to keep being nimble. I think we'll see more builders offering lease to own options, or tying up with institutional investors to build rental communities. Single-family rentals are becoming a bigger part of the market. Some builders are even setting up their own mortgage arms to control the rate buydown process. Luna: That's fascinating. And it points to a longer-term structural change. Home builders are effectively becoming hybrid financial-service companies. Lucas: It's the kind of nuance you don't get from a headline. And honestly, that's why we do this show ad-free—so we can dig into the details without worrying about sponsor messaging. Luna: Yeah, we want to keep this a resource for listeners who care about understanding the economy, not just soundbites. If that resonates, the best way to support is completely optional: buy me a coffee dot com slash fexingo. Lucas: Exactly. And the coffee analogy works—because thinking through these dynamics takes a few quiet minutes. Luna: So where do builders go from here? With import prices from China hitting their highest since 2008, materials costs aren't going to ease soon. That headline came out just last week. Lucas: No, they're not. And with the Fed still holding rates steady, mortgage affordability isn't improving. So the builders that survive will be the ones that can pivot quickly—smaller footprints, creative financing, and maybe even prefab construction to reduce on-site labor. It's a wake-up call for an industry that's been slow to innovate. Luna: And we'll be watching the next PCE print to see if the Fed gets any room to cut. But for now, it's adapt or get left behind. Lucas: Exactly. Stagflation is reshaping everything, and home builders are right in the crosshairs.