Home Builders Cautious About Rising Interest Rates


While builders’ confidence in the housing market remains strong, many are increasingly concerned about rising interest rates. The Federal Reserve has been lifting interest rates this year in an effort to stall inflation. This month the Fed announced its sharpest rate hike in more than 20 years at half a percentage point. 1 While interest rate hikes may tamp down inflation overall, they will not immediately solve the supply chain issues driving much of the price growth in the building materials market. Throughout the pandemic, the price of building materials such as lumber, concrete and steel has continued to rise. The most recent data from the Bureau of Labor Statistics shows that building materials prices have increased 20% year-over-year. 2 Analysts also point out that many of the record number of new homes under construction are still listed as ‘under construction’ because builders are waiting for materials to be delivered. Even if the Fed is successful in calming inflationary pressures, the supply chain issues will continue to drag on the sector overall.

Builders are also concerned that higher mortgage rates could put a damper on demand for new housing. Rising mortgage rates are often seen as a leading indicator that the market is changing. Material costs and home prices are already putting pressure on some buyers and continued interest rate hikes could knock would-be buyers out of the market completely. The latest data shows that the sale of new homes has fallen this spring. However, the current pace of home sales still exceeds pre-pandemic peaks. Analysts also point out that, while rates have been rising, they are still relatively low and the overall shortage of homes for sale relative to demand will help alleviate some of the hit the housing market may take from rising rates.

  • 1 Federal Reserve, Implementation Note May 4, 2022
  • 2 Bureau of Labor Statistics, Producer Price Indexes, April 2022

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