Q3 US Economy Report Shows Critical Housing, Spending Trends

Recent forecasts suggest the US economy points toward a "soft landing" with recession probability at around 20%. September's existing home sales dropped to 3.84 million units, reaching their lowest point since October 2010. The stark difference between economic stability and specific market challenges characterizes our current economic situation.

The American housing market faces declining sales, yet the construction sector tells a different story. US engineering and construction spending should close 2024 with a 3% increase, down from 11% growth in 2023. New home sales have surged 20% since early 2023, though median prices dropped more than 10% during this period. These opposing trends in the housing sector highlight the US economy's complex nature. The critical housing and spending patterns from Q3 2025 deserve attention as stakeholders navigate these economic challenges.

How Is the US Economy Doing in Q3 2025?

The US economy stayed strong in the third quarter of 2025 despite many challenges. Real GDP grew 2.8% annually in Q3, just below Q2's 3.0% expansion. This growth rate stands well above long-term trends and shows the economy's continued strength.

GDP growth remains above trend

Consumer spending drove economic growth with a strong 3.7% increase during the quarter—the best performance since early 2023. This activity added nearly 2.5 percentage points to total GDP growth. Healthcare services, especially outpatient care, and food services saw notable gains.

Federal government spending played a key role with a 9.7% jump as defense spending surged 14.9%. This federal activity contributed 0.6 percentage points to overall growth. Exports rose 8.9%, though their positive effect decreased due to an 11.2% rise in imports.

The national economy grew 4.7% in current dollars to reach $29.35 trillion. Private inventory investment fell during the quarter, and residential fixed investment dropped more than in Q2.

Labor market disruptions from weather and strikes

Weather events and labor disputes created major disruptions in the job market during Q3 and early Q4. Hurricane impacts and significant strikes, including at Boeing, affected October employment numbers. These short-term factors masked the real employment trends as the job market gradually cooled.

Monthly payroll job growth in 2025 averaged 186,000, down from 251,000 in 2023. The unemployment rate stayed just above 4.0% in late 2025. Hurricane effects caused a temporary rise in weekly unemployment insurance claims during Q3.

The job market stayed stable overall with unemployment rates matching non-cyclical estimates.

Inflation cools but services remain sticky

Q3 brought good news about inflation. The PCE price index—the Federal Reserve's main inflation measure—rose just 1.5%, much better than Q2's 2.5% increase. This number fell below the Fed's 2% target.

Core PCE stayed at 2.2%, which shows ongoing inflation pressures. Different sectors tell different stories. Goods prices stabilized while service prices kept rising.

Housing costs gave hope for improvement. September shelter costs rose only 0.2% from August. Service prices proved stubborn. Personal care costs jumped 4.6% year-over-year, and airline fares kept climbing.

The consumer savings rate dropped to 4.8% in Q3 from 5.2% in Q2. This suggests people might be using savings to keep spending.

The US economy shows remarkable strength with above-trend growth. Weather disruptions, strikes, and uneven inflation will shape economic conditions as we head into 2025.

National Housing Market Slows Amid Mortgage Volatility

The American housing market shows a split personality in Q3 2025. New and existing home segments tell very different stories. High mortgage rates and affordability issues continue to squeeze housing activity this fall.

Existing home sales hit 14-year low

Sales of existing homes dropped to 3.84 million units in September - the lowest since October 2010. Numbers fell 1.0% from August and slid 3.5% below September 2023 levels. The Northeast took the biggest hit with a 4.2% drop. The Midwest saw a 2.2% decline and the South dipped 1.7%. The West stood out with a 4.1% uptick.

First-time buyers made up just 26% of September's purchases, matching August but down from 27% last year. This number sits nowhere near the 40% that economists say makes for a healthy market. Cash buyers now represent 30% of sales, up from 29% in September 2023.

A silver lining appears in the inventory picture. Available homes rose 1.5% to 1.39 million units in September, jumping 23% from last year. The months' supply climbed to 4.3 - reaching levels not seen since May 2020. Yet, inventory still lags behind pre-pandemic figures of 1.8 million units.

New home sales supported by builder incentives

New construction paints a brighter picture than existing homes. September saw new home sales edge up to 738,000. Builders have turned to creative incentives and strategic price cuts to keep sales moving despite volatile mortgage rates.

The numbers tell the story: 59% of new home communities offered deals on to-be-built homes in September. Quick move-in properties saw even more aggressive pricing, with 79% featuring special offers. Builder price cuts reached 38% in October - close to pandemic-era highs - and the average reduction grew to 6% after staying around 5% for months.

These aggressive builder tactics have made new homes more appealing than existing ones. Peter Boockvar from One Point BFG Wealth Partner explains it well: "The elevated level of home builder incentives was the main catalyst for the large upside surprise to new home sales".

Homeownership rate dips as affordability worsens

Homeownership dropped to 65.6% in Q3 2025 from 66% last year. This decline shows how affordability challenges persist despite small improvements in some areas. Housing costs now eat up 33.5% of the average national wage, going beyond the standard 28% lending guideline.

Monthly costs for mortgages, insurance, and property taxes average $2,045. This represents a 3.3% drop from the previous quarter's peak but matches last year's figure. One-third of analyzed markets see these expenses consuming at least 43% of local wages - a clear sign of serious affordability issues.

Demographics reflect these challenges. The National Association of Realtors reports that first-time buyers' median age has hit 38 - an all-time high. Renters drive most of the growth in occupied housing. Between Q3 2023 and Q3 2025, renter-occupied units grew by 1.1 million while owner-occupied homes added just 0.6 million.

Rental vacancy rates climbed to 6.9% in Q3 2025 from 6.6% a year ago as new apartment buildings opened their doors. This move toward renting shows how ongoing affordability hurdles continue to reshape the American housing scene.

Mortgage Rates and Builder Sentiment Remain Volatile

Mortgage rate volatility continues to shape the US economy in late 2025. The American housing market feels these effects deeply. The Federal Reserve's predicted rate cuts have triggered unexpected reactions in mortgage markets.

Rates rebound after Fed rate cut

The Federal Reserve cut rates by 50 basis points in September, yet mortgage rates climbed unexpectedly. The 30-year fixed rate hit a two-year low of 6.08% in September before jumping to 6.72% by late October. October's monthly average settled at 6.43%.

Many homebuyers misunderstand this relationship. Freddie Mac's chief economist Sam Khater points out that long-term rates drive mortgage rates. These rates already factored in the Fed's expected actions. Data from six previous rate-cutting cycles shows mortgage rates typically rose by 0.1 percentage points six weeks after the Fed's original cuts.

The bond market expected fewer future rate cuts because of stronger economic growth. This created more upward pressure on mortgage rates.

Rate lock-in effect limits inventory

The changing rate environment makes the "lock-in effect" worse. Homeowners with low-rate mortgages now hesitate to sell. The financial cost of moving jumped from $38,000 in September to $42,000 in October 2025. A homeowner with a 2.8% mortgage now needs about $48,000 more each year just to reset their loan at current rates.

New research shows the lock-in effect caused 44% of the drop in mortgage borrower mobility between 2021 and 2022. This mostly affects local moves rather than job-related relocations.

New homes made up 28% of total inventory in Q3 2025, the lowest in three years. The market shows signs of gradual improvement. The share of homeowners with sub-3% mortgages dropped to 20.4% from its peak of 24.6% in early 2021.

Builder confidence remains below neutral

Builder sentiment stays cautious amid these tough market conditions. The National Association of Home Builders' Housing Market Index rose to 43 in October, marking two straight monthly increases. The index remains below the neutral 50 mark since August 2023.

Builders have responded to market pressures. About 38% cut prices in October, with average reductions growing to 6% from the previous 5%. Sales incentives became common, with 65% of builders offering them.

Regional differences emerged in builder confidence. The Northeast and South regions showed the strongest improvements. Current confidence levels still lag nowhere near the peak of 84 from December 2021.

Contractor Planning Adjusts to Shifting Demand

Construction companies in America are moving faster to change their business strategies as market needs change in 2025. These adjustments show bigger changes in the US economy and what consumers want now.

Multifamily backlog increases rental vacancies

The rental market has too many available units as previous construction projects finish up. Multifamily vacancy rates reached 7.1% in September—the highest number since records started in 2017. This big increase comes from a wave of construction that peaks in 2025. More than 600,000 new units will be ready this year, making it the biggest apartment construction boom since 1986.

Yes, it is true that the gap between supply and demand dropped by 57.8% from Q1 to Q3, but many markets still have too many empty units. Right now, 686,000 more units are being built, even though there's a 28.7% drop in multifamily development compared to last year. Phoenix leads with 1,170 units, followed by Atlanta with 836 units and Dallas with 400 units.

Construction of public infrastructure accelerates

Government projects have become a reliable source of income for contractors. Government spending at local, state, and federal levels made up 22% of all construction spending in 2025.

Public safety construction has grown faster, with a 28% increase compared to last year. This includes police stations, fire departments, courthouses, and military buildings. The overall nonresidential spending growth slowed to 5.3% compared to last year, but infrastructure projects keep moving forward.

In spite of that, some parts of infrastructure show signs of slowing down. This sector's spending dropped by 0.2% in Q2 2025, while quarter-to-quarter growth slowed to 7.8%. Highway and power generation projects showed the biggest quarterly drops.

Contractors reduce luxury features to maintain margins

Contractors are changing what they offer because of cost pressures and market changes. Home builders have cut back on custom and luxury options over the last several years to keep making money. Some homebuyers now choose to upgrade after purchase instead of getting builder-provided features.

Luxury home construction still makes financial sense despite its challenges. High-end homes cost between $250-$450 per square foot for labor and materials, but profit margins can reach 20-35%. Custom luxury projects in wealthy areas can make more than $250,000 per project.

Many contractors are also finding specialized markets that make more money. Green building and sustainable construction now bring in net profits of 18-25%, helped by government incentives and growing customer interest. Large-scale infrastructure projects make less money with 4.5-6% margins but provide steady work with government funding.

US Economy Outlook for 2025 Points to Gradual Recovery

Economic forecasters predict a gradual recovery for the US economy heading into 2025, as several factors shape its path forward. The economy should grow at 1.7% in 2025 and slow to 1.4% in 2026. These projections reflect both promising opportunities and potential hurdles ahead.

Fed expected to cut rates further

The Federal Reserve cut its standard rate to 3.75-4.00% in October, which marks the fifth reduction since inflation peaked after the pandemic. Analysts expect another quarter-point cut in December. They project roughly 100 basis points of additional easing through 2026. This measured easing cycle should help balance labor market stability without triggering inflation again.

Housing inventory may improve with lower rates

The housing market shows early signs of stability as mortgage rates dropped to 6.19% in late October. Active listings have reached 1.55 million—14% above last year's levels. Price cuts have become common, with 26% of listings seeing reductions. These trends suggest housing affordability could improve steadily.

AI and climate investments support business growth

AI-related capital spending added 1.1% to GDP growth in 2025's first half. Tech companies have invested $342 billion in capex—62% more than last year. Climate tech has drawn $7.6 billion in venture capital during 2025, showing a 15% increase year-over-year. These investments help build resilience across key sectors.

Risks include tariffs, labor shortages, and inflation surprises

Rising tariffs pose the biggest threat to economic growth, potentially reducing global output by 0.3% next year. The US tariff rate has jumped to 15.8% from 2.3% in late 2025, which might keep inflation higher than expected. Labor shortages could affect up to 2.5 million workers by early 2026, made worse by immigration restrictions.

Conclusion

The latest Q3 2025 numbers paint a complex picture that residential contractors need to understand as they head into the new year. The housing market has split in two directions. Existing home sales have dropped to their lowest point in 14 years. Yet new construction remains strong thanks to builder incentives. This split shows why contractors must adapt their business approach quickly.

The economy keeps pushing forward despite some obstacles. Q3 saw above-trend GDP growth at 2.8%, which came mostly from consumer spending and federal dollars. Mortgage rates keep swinging up and down even as the Fed cuts rates. The September rate cut proved this point - rates went up instead of down, showing how old market rules don't always work anymore.

Builders and contractors aren't sitting still. They've changed how they do business. Some have cut back on custom options to protect their profits. Others now focus on specialized work like green building or infrastructure projects where margins are better. These changes show how well the industry adapts when times get tough.

As we look toward 2026, residential contractors should watch several key factors. More Fed rate cuts could help make mortgages more affordable. This might bring first-time buyers back into the market after high costs kept them away. Rising vacancy rates in rentals could push investment back to single-family homes as apartment construction slows down.

Success will come to contractors who keep an eye on economic signals and stay ready to pivot. While forecasts point to modest 1.7% growth in 2026, many factors need careful attention - from tariffs to worker availability to inflation trends.

Through every economic cycle, construction has bounced back strong. Current data suggests this time won't be different. The most successful contractors will mix careful planning with smart growth moves. They'll update their business approach as markets evolve rather than stick to old playbooks.

Key Takeaways

The Q3 2025 US economy reveals a tale of two markets - overall resilience masking significant housing sector challenges that contractors and investors must carefully navigate.

• Housing market splits dramatically: Existing home sales hit 14-year lows while new construction shows resilience through aggressive builder incentives and price cuts.

• Mortgage rates defy Fed cuts: Despite September rate reductions, 30-year mortgages climbed to 6.72%, creating persistent affordability challenges for homebuyers.

• GDP growth remains strong at 2.8%: Consumer spending drives economic resilience, but contractors face margin pressure requiring strategic pivots to specialized niches.

• 2026 outlook favors gradual recovery: Expected Fed rate cuts may unlock housing demand, though tariff risks and labor shortages pose significant headwinds.

• Contractor adaptation accelerates: Successful builders reduce luxury features, pursue infrastructure projects, and embrace green building to maintain profitability amid market volatility.

The construction industry's ability to adapt business models while monitoring economic indicators will determine success as the market transitions toward potential recovery in 2026.