How Federal Interest Rate Hikes Are Impacting Contractors

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The U.S. inflation rate in March reached 8.25%, representing the fastest 12-month pace since 1981. In an effort to lower inflation, the Federal Reserve raised interest rates in March by 25 basis points and then by a half a percentage point in May, its largest rate increase since 2000. It’s expected that the Fed will also make an additional three big rate increases over the next few months, according to The New York Times, as inflation continues to rise, causing hardships for Americans and making it difficult for businesses, including contractors, to plan for the future.

The Fed’s plan to slow down inflation could hurt the construction industry, particularly the homebuilding market. An increase in federal rates drives up 30-year fixed-rate mortgages along with inflation. Recent data from Freddie Mac pegs the average rate on a 30-year mortgage at 5.25%.

Does this mean a slowdown in new home builds?

Higher loan rates make it more difficult for individual homeowners to buy homes as well as developers to build homes. “Builders expect home sales and the housing market in general to slow down,” said analyst Rose Quint, National Association of Home Builders (NAHB), due to rising construction and borrowing costs. “Interest rates hit from both ends. At the builder’s side it’s on acquisition, development, and construction financing. And then on the buyer’s side obviously, on mortgages.”

According to Zillow Group, in April, the monthly mortgage payment on a typical home jumped to $1,475, assuming a 30-year fixed-rate mortgage with a 20% down payment. This is up 34% since December and 53% from April 2021.

Early signs of a potential cooling of home building have already surfaced, according to The Wall Street Journal. The Commerce Department in late May reported that sales of new homes dropped 16.6% in April from March, at a seasonally adjusted annual rate, to the lowest level since April 2020, when the pandemic halted commerce.

Not only do higher loan rates make borrowing more expensive but they also add another factor to the already increased cost of construction. Lumber prices alone, for example, added about $36,000 to new home prices.

How will construction in infrastructure be impacted by higher rates?

Infrastructure projects involving highways and streets, transportation, water supply, and sewage, among others, are set to lead construction industry growth as funds from the Infrastructure Investment and Jobs Act begin to flow to contractors, according to a Construction Market Outlook report from consulting firm RSM. New infrastructure projects will begin in the second half of 2022 and continue through 2023, with expected growth rates of 20.1% and 10.9% for infrastructure put in place in 2022 and 2023, respectively, according to Oxford Economics. In contrast to nonresidential and residential construction, infrastructure projects are typically immune to rising interest rates and inflation.


Sources: The New York Times, The Wall Street Journal, NAHB, RSM