BOSTON REIA • INVESTOR NEWS & INSIGHTS
Impact of Elevated Interest Rates on Home Construction in America
Today’s housing starts fell short of estimates, which isn’t surprising given that builder sentiment plummeted yesterday to levels not seen since 2012. With mortgage rates hovering around 7.5%, the outlook for housing construction heading into 2027 appears challenging. I addressed this issue at HousingWire’s Homebuilder Summit yesterday and also discussed it in today’s episode of the HousingWire Daily podcast. Although builders are attempting to mitigate further declines in new home sales with rate buydowns, their profit margins are shrinking, making this increasingly difficult.
According to Census: Housing Starts: Privately-owned housing starts in September reached a seasonally adjusted annual rate of 1,221,000, which is 5.2 percent (±11.8 percent) down from the revised August estimate of 1,288,000, and 7.4 percent (±11.5 percent) lower than the September 2025 rate of 1,319,000. For single-family housing starts in September, the rate was 859,000, a decrease of 4.6 percent (±10.0 percent) from August’s revised figure of 900,000. The rate for multi-family units in buildings with five or more units stood at 349,000.
The chart below indicates a long-term decline in housing starts, reflecting builders’ efforts to manage their construction pipelines amid rising rates. Since the onset of conflict this year, mortgage rates have climbed notably, and as we approach 2027, there’s little confidence among builders that housing starts will improve next year.
Housing Permits: In September, privately-owned housing units authorized by building permits were at a seasonally adjusted annual rate of 1,400,000. This represents a 0.2 percent decrease from the revised August rate of 1,403,000 and is down 3.0 percent from the September 2025 rate of 1,444,000. Single-family authorizations dropped to 845,000, marking a 4.0 percent decline from the revised figure of 880,000 in August. Meanwhile, authorizations for units in buildings with five or more units were at a rate of 503,000 in September.
As we head into 2027, the landscape for issuing more housing permits is less than favorable, given the rising rates and increasing costs for some builders. With the Federal Funds rate on the rise, multifamily construction costs are likely to spike in 2027 as well. Even though rental vacancy rates have stabilized, which ideally should prompt an increase in housing permits, the financials simply don’t favor builders at this time.
Builder Confidence at Record Low
Given the rising rates since the onset of the conflict, it’s no surprise that builder confidence—and all its subcomponents—has declined significantly, especially as rates are now nearing yearly highs.
On a positive note, builders are gradually working through some excess inventory. Historical data shows that when completed units for sale surpass 120,000, builders tend to scale back on construction. As reflected in the chart below, this number is indeed on the decline.
If mortgage rates decrease and demand increases, there’s potential for housing construction to rebound as builders will feel more at ease issuing permits due to reduced excess supply.
Conclusion
New home sales have significantly outperformed existing home sales in recent years, remaining aligned with 2019 levels. This stability is largely due to builders sustaining demand by offering lower mortgage rate options. Although sales are not deteriorating, growth has stagnated for the past decade.
Moving into 2027, builders must focus on reducing their surplus inventory. However, sustained mortgage rates around 7.50% will impact their profit margins, creating an unfavorable environment for growth in housing construction. Thus, lower mortgage rates are crucial for any potential recovery. If these rates do not decline, anticipate decreased production in 2027.
