INSIGHTS

On August 25, 2025

AAM Viewpoints — Housing, Small Business Optimism and the Economy

Many factors contribute to growth in the U.S. economy, but we will start with two that are important to our investing outlook:

1. Housing data can be a useful barometer for where the general economy may be headed as the combined contribution to GDP generally averages 15-18% through residential investment and consumption spending on housing services.
2. The National Federation of Independent Business (NFIB) Survey of Small Business Economic Trends is also useful in evaluating where we are headed as small businesses employ over 60 million people, which translates into 47% of the total U.S. workforce and 44% of economic activity. Small businesses create nearly 1.5 million jobs annually and account for 64% of new jobs in the U.S.
   

Headwinds remain for housing

The home construction figures will help economists shape their estimates for the 3^rd quarter (Q3) GDP. Prior to the housing starts report, the Federal Reserve Bank of Atlanta’s GDPNow forecast reflected essentially no contribution from residential investment. The residential contribution to the fixed investment component of GDP in the initial reading for Q2 was negative for the fourth time in the past five quarters at -0.19%. Even though we had a reversal from Q1 with the initial Q2 GDP print at 3.0%, the Atlanta Fed currently estimates Q3 GDP at 2.3%, which is down from 2.5% after the housing starts release from the U.S. Census Bureau on August 19. The forecast for residential investment growth decreased from 1.1% to -5.9%. We believe we should keep an eye on the trends because as goes housing, so goes the consumer.

Affordability

The most effective way to tackle the nation’s housing affordability crisis is to increase the housing supply. One of the primary challenges to housing affordability seems to be the level of 30-year fixed rate mortgages is preventing homeowners from relocating. In July 2020 the average 30-year fixed rate loan was below 3% and remained below 3% until September 2021. The latest estimates from Realtor.com suggest that 82% of outstanding mortgage debt has a sub-6% rate. 32.7% of outstanding mortgages have an interest rate between 3% and 4%, 17.9% have a rate between 4% and 5%, 9.9% have a rate between 5% and 6%, and 18.8% have a rate of 6% or greater. This compares to their report from Q4 of 2024 when half of existing mortgages were below 4% and nearly three quarters were below 5%. With home prices moving steadily higher, homeowners are reluctant to sell their existing home and move.

Source: National Association of Realtors

Where do mortgage rates need to fall to free up additional inventory? The National Association of Realtors recently estimated that a 30-year fixed-rate mortgage at 6% would make the median priced home affordable for nearly 5.5 million more households. They estimate that if rates did get to that level, about 10%, or 550,000 households would buy a home over the next 12 to 18 months.

Builder Confidence – NAHB/Wells Fargo Housing Market Index (HMI)

The National Association of Home Builders (NAHB) is one of the largest trade associations in the United States. Founded in 1942, the NAHB members build approximately 80% of new homes constructed in the U.S. HMI measures homebuilders’ confidence and has remained below the 10-year average of 61 since June 2022.

Source: National Association of Home Builders

As discussed above, many potential home buyers remain on the sideline waiting for lower interest rates. While housing affordability remains critically low, as home prices and mortgage rates continue to move higher, builders are feeling less optimistic about 2025 market conditions. Builder confidence in the market for new single-family homes was 32 in July — matching the lowest level since 2022. To entice buyers while mortgage rates remain high, 37% of builders have been cutting prices, and the number of builders using sales incentives reached a post-pandemic high of 66%.

National Federation of Independent Business (NFIB) Survey of Small Business Economic Trends is slightly above the 52-year average

In the past, we have written about trends in small businesses based on the NFIB Optimism Index. We follow these trends because small business owners and small companies in the U.S. create about two-thirds of net new jobs, drive innovation and account for 44% of U.S. economic activity. This survey also serves as a counterbalance to the large-company bias of the Institute of Supply Management (ISM) economic indicators. With a 52-year history of tracking insight from more than 325,000 small business owners the survey provides valuable data related to Small Business Optimism, Labor Markets, Capital Spending, Inventories, Credit Markets and Inflation.

Optimism

The NFIB Small Business Optimism Index rose 1.7 points in July to 100.3 and is slightly above the 52-year average of 98 and has exceeded that level in seven of the last nine months. The primary contributor to the increase was from respondents reporting better business conditions and reporting that it is a good time to expand. Interestingly, optimism is up despite the Uncertainty Index increasing by 8 points to its fifth highest reading ever.

Source: National Federation of Independent Business

Labor Markets

33% of small business owners reported job openings they could not fill in July. Down 3% from June and the lowest level since December 2020. This remains above the historical average of 25%. 57% of business owners report they are hiring or trying to hire while 48% reported few or no qualified applicants for the positions. In July, 21% of businesses reported labor quality as their most important problem, up 5 points from June and the largest monthly increase in three years.

Source: National Federation of Independent Business

Capital Spending

Capital spending remains historically weak with 55% of owners reporting capital outlays in the last six months. In the next few months only 22% plan to spend, this is also a historically weak number. Owners need cheaper access to capital as the heyday of easy money post-COVID continues to dry up.

Tariffs, weakening consumer sentiment and inflation have small business owners taking a pessimistic view and reducing investment spending. As you can see below, sentiment dropped in August, as evidenced by the University of Michigan Consumer Sentiment Index, to 58.6 from 62.0. This was the first drop in four months. The gauge for current conditions dropped to 60.9, the lowest since May, while the measure of future expectations declined by 0.5 points. Consumers expect prices to rise 4.9% over the next 12 months, up from 4.5% last month. Long-run inflation expectations also increased from 3.4% to 3.9%.

Inflation

In July, 24% of small business owners raised prices, which was down 5%. However, price increases remain above the average of 13% while only 11% of small business owners reported inflation was their most important problem. This is unchanged from the previous month’s reading, which is the lowest since September 2021. Owners also reported that looking forward 28% plan to increase prices. Although the percentage is down, this remains above historical averages.

Outlook

Despite the July pickup in housing starts, it’s difficult to imagine a sharp rebound with permits reaching a fresh cycle low and the fourth consecutive month-over-month decline. The nation’s homebuilders have grown more cautious in the past couple of years as a doubling of mortgage rates kept many homeowners locked in place. This environment has restrained demand and contributed to the biggest supply of new homes since 2007. While builders have cut prices and offered generous incentives, residential construction has been a drag on the economy in four of the last five quarters. This drag will likely continue for the foreseeable future as data from Redfin shows July was the slowest summer sales pace since 2015 with the typical home sitting on the market for 43 days.

We also find some of the results from the NFIB survey surprising when considering the headwinds faced since the pandemic and the uncertainty from tariffs and inflation. In July, there was a notable improvement in overall business health. When rating the overall health of their business, 13% of businesses reported excellent, 52% reported good, and 31% reported fair. This is more positive than we would have anticipated with so much uncertainty.

The biggest concerns for small business owners are inflation and labor. Small firms find it more difficult to manage inflation pressures and the simplest solution is to pass on higher costs to customers. If inflation subsides slowly, consumers are likely to reduce spending and small businesses will remain under pressure. When evaluating job openings, and the number of Americans who quit their jobs in June, both have been declining as employers continue to struggle to retain and hire workers. This leads me to believe headwinds for economic growth, and market volatility, may continue into 2026.

CRN: 2025-0801-12764 R