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More than half of U.S. residential construction companies are effectively operating at a loss, even though many report being profitable on paper, according to a new industry study by the Association of Professional Builders (APB) which works with owners and directors to improve the industry.

The association’s 2026 State of Residential Construction Industry report found 51.4 per cent of U.S. residential builders were operating unprofitably once accounting accuracy was applied, although only 17.1 per cent reported a loss.

The report identified widespread accounting inaccuracies that result in profitability being overstated on financial statements. As a result, builders are making decisions based on incomplete data.

“The data shows a clear difference between reported profitability and financial reality for many building companies,” said APB co-founder Russ Stephens. “When core financial metrics are not fully understood or applied correctly, profitability can be overstated without builders realizing it.”

The report analysed financial and operational data from residential builders across the nation. The gap, researchers say, stems largely from misunderstandings of core financial metrics.

At the same time, employment data points to weakening conditions across the industry.

An analysis of federal labour statistics by the Associated Builders and Contractors (ABC) revealed the construction sector lost 11,000 jobs in December. Excluding the first year of the COVID-19 pandemic, 2025 was the weakest year of annual job growth since 2011. The industry’s unemployment rate stood at five per cent in December

ABC recently reported its construction backlog indicator fell to eight months in January – a four-year low. Smaller contractors have seen sharper drops in backlog than firms with annual revenues above $50 million.

Broader contractor sentiment has also weakened.

In a new outlook survey released by the Associated General Contractors of America, contractors reported “dampened” expectations for 2026 amid concerns about tariffs, enhanced immigration enforcement and the risk of recession.

Roughly 70 per cent of firms said they have been affected by tariffs this year. Forty per cent responded by raising bid prices, while 20 per cent added price-sharing provisions to contracts. Eleven per cent reported absorbing most or all tariff-related costs themselves, further pressuring margins.

Immigration enforcement has also disrupted labour supply. One-third of firms said they were affected by enforcement actions in the past six months, including workers leaving job sites or subcontractors losing personnel.

Six per cent report a jobsite or offsite was visited by immigration agents. Eleven per cent report workers left or failed to appear because of actual or rumored immigration actions, and 24 per cent report subcontractors lost workers.

More than three-fifths of contractors reported an owner postponed or canceled a project within the past six months. Funding uncertainty and high financing costs were cited most frequently as reasons.

An economic slowdown or recession was the top concern for 62 per cent of respondents, followed by workforce shortages and rising labour costs.

Homebuilder sentiment reflects similar strain. The National Association of Home Builders (NAHB) reported its Housing Market Index fell to 37 in January, with all major components declining. The index measuring future sales expectations dropped below 50 for the first time since September, signaling more builders view conditions as poor rather than good.

Affordability challenges continue to weigh on buyers, with high home prices and elevated mortgage rates limiting demand in the entry-level and mid-range markets. Forty per cent of builders reported cutting prices in January and the average price reduction rose to six per cent. Sixty-five per cent said they were using sales incentives to close deals.

“While the upper end of the housing market is holding steady, affordability conditions are taking a toll on the lower and mid-range sectors,” said NAHB chairman Buddy Hughes. “Buyers are concerned about high home prices and mortgage rates, with downpayments particularly challenging given elevated price to income ratios.”

While mortgage rates have eased modestly in recent weeks, builders report ongoing pressure from rising material costs, regulatory burdens and labour shortages.

Some segments of the broader construction industry are showing resilience. Data centre and power projects, fueled by artificial intelligence and infrastructure demand, are projected to grow in 2026, according to industry outlooks.

However, residential and certain commercial segments – including lodging, retail and private office – are facing declining expectations.

For homebuilders already struggling with thin or negative margins, the convergence of tariffs, labour constraints, higher borrowing costs and softer demand may prove especially challenging.

Industry advocates are urging federal policy-makers to provide clarity on trade policy, expand lawful temporary work visa programs for construction and advance infrastructure funding legislation before current authorizations expire later this year.

Absent meaningful relief, analysts warn more contractors could find themselves completing projects at a loss – and the industry’s recent job losses could accelerate.

The latest data suggests while a small group of financially disciplined builders continue to outperform, much of the residential construction sector is navigating 2026 on increasingly unstable ground.