How Do Rising Interest Rates Affect the Construction Industry?

After a few years of keeping interest rates low, the Federal Reserve is increasing them again. In an attempt to keep inflation from spiraling out of control, the Fed uses interest rates to control the costs of goods and services. It tends to carry a heavy weight in the construction industry, and you may already see the effects. Here are a few things you can expect as a result.

Interest Rates and Inflation
If it’s hard to see the connection between interest rates and inflation, you’re not alone. There are several degrees of separation between them. When interest rates are low, it’s easier for people and institutions to borrow money. When money is easy to get, the costs of goods and services tend to go up. The Fed raises rates on the loans the banks make to each other as a way to control inflation. Although you might notice immediate changes to things like mortgage interest rates as a result, other changes could take months or even a year to show up.

Buying Power
For the construction industry, interest rates affect the kind of buying power that investors, businesses, and property owners have. Although many people pay cash for construction, it’s common to rely on short-term or long-term loans to pay for it. The amount that a person or business can get in a loan depends on how much they can pay back. Interest rates determine the size of the payment, with higher interest rates demanding a higher payment. As such, interest rates can determine how much people can spend on a construction project.

Interest rates also affect the way that lenders approve borrowers. When interest rates are low, borrowers may have more options to finance a construction project. As interest rates get higher, borrowers have to be more selective about the lending options they choose. They might be priced out of a few of them, especially if they aren’t highly qualified for financing. On the other side of the coin, lenders become pickier about who they will approve. They may expect a higher degree of qualifications to handle a higher payment or a longer term for the loan.

Project Planning
Changes in interest rates can also cause investors to rethink their project plans. It depends on their limitations and their goals for the project. For example, an investor who is trying to get ahead of rising interest rates might be more likely to schedule a project sooner, instead of waiting and possibly paying more. By comparison, a property owner who is already stretched thin may have to wait on a project because they can’t afford it at the moment. Rising interest rates often have a cooling effect on demand for projects as a result.

How Rising Rates Can Affect Your Contracting Business
Eventually, you may start to see these changes trickle down to your contracting business. Investors and property owners who are hoping to lock in a better rate now could be looking for contractors who are ready to start right away. So, contracting businesses that are prepared might get more business at first. Over time, the number of new construction starts may decrease due to the higher cost. This means that contracting businesses may have to compete for more for a smaller number of available projects.

Rising interest rates tend to have a big effect on the construction industry. If you know what to expect, you can prepare. For more tips on running a successful business, visit CSLS today!

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