How Rate Cuts Fuel the Construction Industry

The Fed cut rates by half a percent on September 18, 2024, which could spur the construction industry as would-be homeowners take the plunge. A half-percent rate cut adds $50,000 in purchasing power to those with a $2,000 monthly mortgage budget. More than that, rate cuts could kick off home improvements as homeowners who were strapped by high interest rates are able to refinance or take out a home equity loan or line of credit. 

While rate cuts certainly help, they don’t necessarily mean money is any less expensive to borrow, thanks to the high inflation rates experienced over the last several years. According to Bankrate, a $30,000 home equity line of credit (HELOC) experienced a +5.01 percentage point hike from 2021 to the week ending September 11, 2024. Home equity loans are up +3.16 percentage points over the same period. 

Nonetheless, many homeowners are likely to tap into their equity for home renovations. This is great news for builders and specialty contractors in the industry. 

Rate Cuts Make Home Equity Lines of Credit and Loans More Attractive

For homeowners who want to make some home improvements or attend to deferred maintenance concerns, a HELOC or new home equity loan is more attractive now. There are some distinctive differences between the two loans. Most notably, HELOCs are lines of credit, so you only have to take out what you need, which means you only pay back what you borrowed (with interest, of course). A home equity loan is a lump sum borrowed at a fixed interest rate. 

It’s important to understand that HELOCs are tied to prime, meaning they have variable rates. When rates decline, the prime rate follows, and so do HELOCs. So borrowers who already have HELOCs can immediately tap into them at a lower rate. But as the interest rate fluctuates, so do the payments. A home equity loan needs to be refinanced to take advantage of lower rates. 

HELOCs are a major source of home renovation financing. A survey conducted by TD Bank showed that 38% of homeowners planning to renovate intended to tap into their home's equity to do so. One of the attractions of using home equity lines of credit or loans for home renovations is that you can deduct the interest you pay on your tax return. 

Rate Cuts Decrease Borrowing Costs for Contractors 

A significant use of HELOCs is to fund a new or existing business. HELOCs give business owners the ability to tap into cash resources for things like new equipment or project financing. Because HELOCs are tied to equity in real estate, they are less expensive than other financing options, like personal or business loans. The equity acts as a safety net for lenders, so they’re willing to loan money at lower costs.   

For contractors, this means financing bigger projects, updating equipment, and restructuring higher-interest loans. The money can also be used to launch marketing campaigns and break into new markets. 

Contractors can use the extra money to boost their skill set by taking continuing education courses or obtaining general or specialty contractor’s licenses. 

Lower Rates Equate to More Housing Starts 

The median sales price for all homes rose 46% over the last five years. Lower interest rates drive down the monthly mortgage rate and increase borrowers' buying power. One survey found that almost 60% of active mortgages have rates below 4% due to historically low rates during the pandemic, making potential buyers much less likely to make a move. 

Now that interest rates have dropped by half a percentage point, home shoppers can take advantage of their increased buying power. However, more demand for available housing leads to higher sales prices, which can be great news for builders. 

In cities with tighter housing markets, building—even more expensive homes—drives down the price of existing homes. In addition, with more buyers looking, there’s more incentive to build new homes. Builders can take advantage of lower rates to build custom homes to cookie-cutter subdivision housing.  

Recent rate cuts create opportunities for contractors, as homeowners are more willing to use their HELOCs to finance renovations or take out new mortgages. Contractors benefit from lower borrowing costs to expand and grow their businesses, thus meeting a growing demand for housing.

An influx of new business makes it an attractive time to become a licensed general or specialty contractor. If you’re ready to take the next step, contact our Contractor Training Center to explore your options. We’re happy to help.