Elevated Mortgage Rates Suppress Home Sales and Renovation Market
Elevated mortgage rates, which have been on the rise since the US-Israeli war with Iran in late February, have not only slowed home sales but also started to dampen the renovation market.
Construction Spending Falls
In September, construction spending dipped 1.9%, erasing the 2.0% gain from August, as material costs and borrowing pressures weighed on residential outlays, according to the U.S. Census Bureau. On a year-over-year basis, spending was down 2.7%, highlighting the challenging conditions in the construction market.
Widening Divide in Construction Market
The data reveals a growing divide between thriving and struggling segments of the construction industry. Private construction spending fell 2.4% in September, with the residential segment bearing the brunt of the decline. Investment in residential projects dropped 5.5%, primarily due to a decrease in renovation outlays, as higher mortgage rates make housing less affordable and homeowners cut back on discretionary spending.
Renovation Sector Affected by Rate Pressures
The renovation sector was particularly vulnerable to rate increases in September. While outlays on single-family housing projects remained steady month-over-month, they were still 2.4% lower than a year earlier, suggesting that affordability concerns are impacting not only transaction volumes but also homeowners' willingness to invest in capital expenditures.
Public and Nonresidential Construction Mixed
Public construction dipped 0.1%, with state and local government outlays falling 0.3%. However, private nonresidential structures rose 1.1%, driven by a 1.2% gain in power plant investment.
Impact of Rate Surge and El Niño Concerns
The recent surge in mortgage rates, fueled by the war, has kept the U.S. housing market subdued throughout 2026, compressing mortgage brokers' origination pipelines. Furthermore, the potential arrival of El Niño by year-end could increase commodity prices, including lumber, adding an inflationary pressure that might delay Federal Reserve rate cuts until 2027. This scenario would further extend the slowdown in purchase and renovation loan demand already observed in September.