In an unprecedented twist, the US construction industry faces a conundrum: Federal Reserve rate cuts aren’t translating into lower borrowing costs. Since September 2024, the Federal Reserve has slashed the policy interest rate by 100 basis points, yet the 30-year mortgage rate has surged by 90 basis points. This anomaly is a ripple effect of President Trump’s economic policies, which blend low taxes and deregulation—seen as pro-growth—with stringent immigration controls and trade tariffs, perceived as inflationary. This peculiar mix has financial markets reassessing the depth of future rate cuts, driving up longer-dated borrowing costs.
The fiscal backdrop adds another layer of complexity. Despite robust economic growth and low unemployment, the US government is running a fiscal deficit of 7% of GDP, raising eyebrows over fiscal sustainability. With markets predicting the US 10-year yield could hit 5% by year-end, 30-year mortgage rates might climb to around 7.3%. This escalation in borrowing costs could dampen demand in the housing market, creating a significant headwind for the construction sector.
Labor supply constraints further exacerbate the situation. President Trump’s immigration policies, marked by increased deportations and deterrents to new immigration, threaten to constrict the labor pool. With a dwindling number of American-born workers, sectors heavily reliant on immigrant labor, such as construction, agriculture, and leisure & hospitality, could face severe workforce shortages. This labor crunch could drive up wages and, consequently, construction costs, putting additional pressure on homebuilders.
Adding to these woes is the specter of tariffs. The second quarter might see the reintroduction of tariffs on materials like lumber and steel, reminiscent of President Trump’s first term. Canada, a major lumber supplier, is squarely in the crosshairs with a proposed 25% tariff on all imports. This potential perfect storm—rising raw material costs, labor shortages, and high mortgage rates—could severely impact the housing market.
Housing starts, a bellwether for construction activity, have been on a rollercoaster ride. After peaking at a 15-year high of 1.6 million in 2021, starts declined to 1.55 million in 2022, 1.42 million in 2023, and 1.36 million in 2024. Projections indicate a further drop to 1.275 million in 2025, stagnating at similar levels in 2026 before a modest recovery to 1.35 million in 2027. This trajectory underscores the challenges confronting the sector.
How might this news shape development in the sector? The confluence of higher borrowing costs, labor shortages, and escalating material prices could catalyze a shift towards innovative solutions. Offsite construction, for instance, could gain traction as a means to circumvent labor constraints and expedite project timelines. Additionally, the industry might accelerate the adoption of sustainable materials and energy-efficient designs to mitigate rising costs and align with evolving consumer preferences.
Moreover, these challenges could spur consolidation within the industry, with larger firms acquiring smaller players to secure market share and enhance operational efficiencies. Policy advocacy might also intensify, with industry stakeholders lobbying for measures to alleviate labor shortages and mitigate the impact of tariffs.
In this dynamic landscape, construction firms will need to navigate a complex interplay of economic, political, and market forces. Those that can adapt, innovate, and advocate effectively will be best positioned to weather the storm and capitalize on emerging opportunities. The human dimension—from the workers grappling with labor market shifts to the families aspiring to homeownership—remains at the core of this evolving narrative. As the industry pivots to address these challenges, it will be crucial to keep people, as well as profits, at the heart of decision-making.
