Homebuilders Needed a Rate Cut, And They Got One. It’s Not Enough

Homebuilding in America has cratered.

Several factors weigh on housing construction, including a weak jobs market, higher supply costs from tariffs, and labor shortages due to immigration crackdowns. However, high borrowing costs might be the biggest headwind for construction.

Last week’s interest rate cut will help, but the troubled industry will likely need more than that.

High Rates Keep Construction Levels Low

Homebuilding has been struggling for years and declined again in August. Census Bureau data showed that new housing construction was down 8.4% from 2024 levels. Homebuilder confidence in September also remained low.

“Fed rate relief and lower mortgage rates can’t come soon enough for the struggling U.S. housing market,” wrote Sal Guatieri, BMO senior economist.

Now that the Federal Reserve has made the first of what could be several interest rate cuts, homebuilders and home buyers alike could soon see relief from high borrowing costs. Federal Reserve Chair Jerome Powell acknowledged that the central bank’s interest rate levels affect the housing market.

“Housing is an interest-sensitive activity,” Powell said during a Sept. 17 press conference. “When inflation gets high and we raise rates, it does burden the housing industry.” 

Housing has a lot of catching up to do. August’s rate of construction starts indicates that only 1.3 million new homes will be built in 2025, down 6% from the same period last year.

Heather Long, chief economist at Navy Federal Credit Union, estimates that the U.S. needs to build about 2 million homes a year to bridge America’s inventory gap. And August building permits were down 11% year over year, signaling that construction isn’t likely to pick up any time soon. 

“The United States is in desperate need of more homes, especially more moderately priced homes, but it’s not happening,” Long wrote. “Lower mortgage rates would help, but the affordability crisis won’t end until more homes are built.”

Rate Cuts Could Also Help Buyers

It’s also possible that lower interest rates could help prospective homebuyers as well, boosting sales.

While mortgage rates are primarily tied to yields on the 10-year Treasury note, lowering the federal funds rate could also have an impact, Powell said. 

“Our policy rate changes do tend to affect mortgage rates,” Powell said. 

But not always. Mortgage rates hardly budged after the Fed cut rates in late 2024. Those persistently high mortgage rates have been a problem for many buyers who have been priced out of the housing market. 

“While mortgage rates are starting to ease, further relief is needed to meaningfully improve affordability in many regions and inspire builders,” Guatieri wrote.