The article below was written by Dr. Robert Dietz, Chief Economist at the National Home Builders Association.
The housing market is increasingly threatened by higher long-term interest rates, renewed inflation pressure, and elevated construction costs. Due to rising inflation concerns, the Federal Reserve was forced to raise interest rates this month.
Market Conditions Tighten
Long-term rates accelerated after the move by the Fed, as the bond market is flashing danger signals for the economy. The 10-year Treasury rate increased from just below 5% in mid-September to near 5.2% in recent days. The 30-year fixed mortgage rate averaged 7.03% as of Sept. 24, up from 6.76% two weeks earlier and reaching its highest level since January 2025. This rate environment is worsening affordability for buyers and raising capital costs for builders.
The central bank’s unanimous decision to raise the federal funds rate by 25 basis points brings the target range to 3.75% to 4%. The Fed noted that economic activity is expanding at a solid pace, but uncertainty remains elevated due to geopolitical developments, trade issues, and the Iran war. Inflation has risen to a 3.4% year-over-year rate, and the Fed’s projections suggest one more rate hike in 2026.
Builder Sentiment Deteriorates
The NAHB/Wells Fargo Housing Market Index fell three points to 32, its lowest level since September 2025. Among the HMI’s components, builder sentiment for current sales and future sales both declined. The latest survey also found that 38% of builders cut prices in September, while 66% reported using sales incentives.
Builders continue to report myriad headwinds including higher mortgage rates, tight lending conditions, rising land, labor and construction costs, higher gas and diesel prices, and persistent labor shortages. In some markets, increased immigration enforcement is also discouraging legal workers from reporting to job sites.
Starts and Sales Constrained by Affordability
Overall housing starts decreased 2.6% in August to a 1.28 million seasonally adjusted annual rate. Single-family starts rebounded 7.6% to a 918,000 annualized pace and were 5.2% above August 2025. However, single-family starts remain down 4.7% year to date, showing that market challenges persist despite the surprise monthly gain. Multifamily starts fell 21.7% to a 357,000 annualized pace and were down 14.6% from one year ago.
Permits also softened, with overall permits down 2.7% and single-family permits down 1.8% to an 878,000 annualized rate. 2026 will be the second year in a row with a decline for single-family home building, and signs indicate further declines in 2027.
Sales of newly built single-family homes increased 6.4% in August to a 684,000 annual rate but were still 2% below the pace from one year ago. Inventory was unchanged at 483,000 units, equal to an elevated 8.5 months’ supply.
The median new-home sales price was $393,700, down 5.8% from one year ago, reflecting builder incentives and a shift toward lower price points. However, mortgage rates near 7% continue to limit entry-level demand.
Remodeling Holds Up Despite Rising Costs
Remodeling is taking on a larger role within residential construction, but cost and labor pressures are intensifying. NAHB's new Remodeling Input Price Index increased 6.6% year over year, up from 3.9% in the previous quarter, reinforcing the broader cost pressures facing the sector.
Residential remodeler employment was 454,100 in the second quarter, accounting for more than 49% of residential building construction employment. Employment was down 1.0% from one year ago but remained more than 19% above its pre-pandemic level. Remodeler wages rose to $37.91 per hour, up 2.3% from one year ago.
Growth Prospects for 2027
Overall, housing remains caught between limited supply and binding affordability constraints. Demand exists but is increasingly sidelined due to higher costs and interest rates. The recent surge for long-term interest rates adds a warning signal for 2027 and the overall economy, as 2026 growth has been heavily dependent on one sector (AI), which is crowding out lending for the rest of the economy, including housing.
