Interest Rates To Rise, How Will New Home Construction Fare?

April 18, 2022 / Blog
Share This Story


Yes, you might feel this. Yes, it might hurt. 


The Federal Reserve’s decision to stymie the rise of inflation by increasing interest rates is going to shore up demand for new residential and commercial construction throughout 2022.  With inflation hitting a 40-year high of 7.9% in April, the .25% increase (with more increases on the horizon) is sure to help push that figure down BUT will make it more expensive to borrow money across many sectors -  including the housing market. When it’s difficult and expensive to borrow money, it’s typical that consumers will hold off on their bigger purchases (houses, cars, backyard utopias). How did we get here? What does it all mean? How will your business fare? Let’s try to unpack it all. 


There are a few better known factors influencing the influx in inflation: COVID-19 stimulus money, employment challenges, and supply-chain disruptions. As relief money filled consumer accounts, their willingness to purchase goods increased; as the supply-chain struggled to keep up thanks to decreases in the workforce and logistical breakdown, ‘money-in-hand’ shoppers were met with bare shelves and astronomical price tags. A perfect example of this is seen in the lumber market from 2020-2022. You are paying more for raw materials which directly impacts the final price of your projects - it’s no wonder that builder confidence of new home sales is falling.  New home sales fell 2.0% in February 2022, a trend that will likely stick around for a few quarters. Basically, a lack of available resale inventory, the increased price of new homes, and a more expensive mortgage will deter new and returning prospects from entering the housing market.


Though there is debate surrounding how long the market will take to regulate, it’s safe to say that the construction industry will feel the reverberations of the increase in interest rates throughout 2022. It’s not all bad news though - it’s important to remember areas of opportunity. Coming off the throes of COVID-19, many workers are still operating from home, giving them the opportunity to emigrate from congested cities into undeveloped rural areas. This, coupled with the extension and possible forgiveness of federal loans, builds consumer reserves and confidence in the market. Additionally, during 2021, renting rates increased to 4.74%, increasing the value of rental income for landlords which could lead to re-investment in new property. With that, increased rent costs could lead those who are able to, to end rental agreements and enter the housing market. Increasingly common catastrophic weather events (hurricanes, wildfires, tornadoes, etc.) will also keep you busy on remediation, renovation, and total loss rebuilds. So while you may not be running from new build to new build, you’re likely to keep busy throughout 2022.

Not only might your revenue take a small hit, but you’re likely to also feel a monetary squeeze from your insurance portfolio. The insurance industry acts as any other business would - if carriers are paying out more money to cover the replacement costs after a loss, they are depleting their cash reserves and have to recoup that value somehow… thus the reason for seeing 10-20% premium increases at renewal. Additionally, coming off the throes of the COVID-19 debacle, it is more expensive now for manufacturers to generate the raw materials used in new builds. Again, if your suppliers are incurring higher costs to provide a good or service, you will pay more to utilize it.  You might also find yourself sidelining employees due to the drop in demand we touched on earlier. This will impact any workers compensation payroll figures you have listed and is a great example of why it’s important to touch base with your agent when any big changes to your business occur - you could be missing out on premium credit. Inevitably, as prices across the board increase, you’re sure to see your insurance costs rise as well.


So there it is - our insight on how the construction and insurance industry will change in the face of economic fluctuations in 2022. What are your predictions for the 2022 housing market? Give us a call, we’d love to hear your thoughts!


Join Us Today!

Contact Us