Newly released September housing data and industry surveys show builder sentiment at a 14-year low as capital shifts toward AI projects and Federal Reserve rate hikes raise borrowing costs. The combination is constraining both housing supply and buyer activity.
Key figures
- The U.S. Census Bureau reported that housing starts fell 5.2% in September to 1.22 million units. That is a 7.4% decline year-over-year and near post-pandemic lows.
- Single-family starts dropped 4.6%, to their lowest level since March 2023.
- Pending home sales fell 7.3% last month, the National Association of Realtors said, marking the lowest level since the series began in 2001.
- Homebuilder sentiment declined this month to its weakest reading since 2012, according to the National Association of Home Builders (NAHB).
Financing and cost pressures
Rising borrowing costs are squeezing both buyers and builders:
- Freddie Mac's most recent weekly reading showed the average 30-year fixed-rate mortgage was 7.4% earlier this month. While rates were briefly higher in 2023, they have not been consistently above this level since fall 2000.
- Elevated mortgage rates have kept many prospective buyers on the sidelines, and higher borrowing costs for developers make new projects harder to justify financially.
Competition for capital and materials
The surge in AI-related investment and continued government spending are drawing large amounts of capital, which competes with housing for resources. Builders now face competition from data center projects for labor and materials such as copper, concrete and HVAC equipment.
Labor and immigration effects
Restrictive immigration enforcement has also tightened the supply of construction workers. NAHB chairman Bill Owens, an Ohio homebuilder, said in the sentiment release: "Nationwide, more than one-third of builders reported immigration enforcement activity in their market areas during the past month, causing construction delays and discouraging legal workers from reporting to work."
Macroeconomic impact
Because housing carries substantial weight in the economy, the sector's weakness has broader effects: residential investment subtracted from overall GDP in five of the last six quarters.
Implications
Despite bipartisan focus on increasing housing supply — including a law passed earlier this year intended to encourage more building — current conditions are stacked against a construction boom. High interest rates, scarce materials and labor shortages mean builders struggle to make projects pencil out, buyers face historically high mortgage costs, and mobility is reduced even for homeowners with pre-2022 mortgages.
Conclusion
The present alignment of interest rates, constrained housing supply and rising construction costs is producing a lose-lose outcome: builders find it hard to afford to build, buyers find it hard to afford to buy, and housing affordability is likely to worsen.
