Residential construction is declining sharply due to high-interest borrowing, tight credit, and an oversupply of apartments, with data confirming a nationwide slowdown in new housing starts and apartment completions. Builders are canceling or delaying projects as financing becomes more expensive and demand softens.
High-Interest Rates and Borrowing Costs
Interest rates remain at decade highs, making it more expensive for developers to secure construction loans. The average rate for a 30-year fixed mortgage is hovering near 6.8%, which is significantly higher than pre-pandemic levels.
Elevated borrowing costs are deterring new development, as developers face increased expenses for both construction and operating needs. The Federal Reserve has kept rates steady, with no immediate plans for cuts, further prolonging the pressure on the housing market.
Tight Credit and Financing Challenges
Access to credit has tightened, with banks and lenders becoming more cautious about approving loans for new residential projects. Many equity investors are opting to buy existing apartment assets at a discount rather than fund new construction, leading to a drop in multifamily housing starts.
This shift is reflected in the number of on-hold and canceled projects, which have surged in recent months. The lack of available financing is compounding delays and reducing the pipeline of new housing units.
Apartment Oversupply and Market Dynamics
Apartment completions now far outpace new starts, signaling a deep slowdown in multifamily construction and setting the stage for a future housing shortage. While the oversupply of apartments has temporarily stabilized rents, experts warn that fewer new units could lead to upward pressure on rents in the coming years.
Inventory levels for new homes remain high, with completed new homes for sale nearing 120,000 units, prompting builders to pull back on new starts. The imbalance between supply and demand is particularly acute in regions with limited land or regulatory hurdles.
Housing Affordability and Market Outlook
High borrowing costs and tight credit have severely impacted housing affordability, locking many first-time buyers out of the market. The share of first-time home buyers has dropped to its lowest level since 1981, pushing more Americans into the rental market. Despite the slowdown, builders are holding onto labor, anticipating that lower interest rates may eventually revive demand.
However, until financing conditions improve and demand rebounds, the residential construction sector is expected to remain subdued.
Image Credit – njbia.org
