The Interest Rate Paradox: Why 7% Mortgages Aren't Crashing the Housing Market
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Why Building Costs Continue Rising Despite Economic Pressures
- Housing is Non-Discretionary - Unlike groceries or gas where consumers can cut back, people still need homes regardless of economic conditions
- Sustained Demand for Materials - Both retail (Home Depot, Lowe's) and wholesale lumber yards are experiencing increased demand despite higher interest rates
- Stable Home Sizes - Square footage requirements haven't dramatically decreased, meaning material needs remain consistent per home
- Growing Population Needs - More people need homes now than before, maintaining steady demand for new construction
International Factors Driving Costs Higher
- Weakening Dollar Exchange Rates - US dollar losing conversion power against other currencies makes imported materials and finished goods more expensive
- Overseas Material Dependencies - Many raw materials and finished products come from international sources affected by currency fluctuations
Transportation and Fuel Cost Pressures
- Multi-Stage Delivery Requirements - Materials move from port to manufacturing to distribution to lumber yard to job site, each step requiring fuel
- Rising Diesel Costs - Fuel at $6/gallon in many areas significantly impacts every transportation stage
- DEF Fluid Shortages - Diesel exhaust fluid supply constraints affecting shipping capacity and costs
- Manufacturing Energy Costs - Natural gas and electricity price increases at production facilities
Supply Chain and Shipping Challenges
- Container Shortages - Limited availability of 20-40 foot shipping containers increases lease rates
- Intermodal Transportation Costs - Complex shipping from Asia through ports, rail, and trucking all requiring higher-cost fuel
- Less-Than-Truckload (LTL) Distribution - Final delivery stages to retail and lumber yards adding cumulative cost pressure
Labor Market Pressures
- Skilled Worker Shortages - Truck drivers, manufacturing workers, and specialized trades in high demand
- Rising Hourly Rates - Labor costs increasing across all stages from manufacturing to on-site construction
- Geographic Labor Arbitrage Limits - Even relocating to lower-cost regions still shows upward wage pressure
Project Timeline Extensions
- Subcontractor Scheduling Gaps - Delays between trades (electrical, plumbing, framing, drywall) extending project timelines
- Municipal Permitting Delays - Government offices facing their own labor shortages, extending approval processes from 10 days to weeks
- Weather and Seasonal Factors - Extended timelines exposing projects to additional weather-related delays and costs
Hidden Cost Multipliers
- Carrying Cost Increases - Every additional month adds approximately 1% to total project cost
- Timeline Example - 90-120 day projects extending to 180+ days, adding 4-6% in costs
- Damage and Loss Exposure - Longer project timelines increase risk of weather damage and material theft
Ripple Effects Across Industries
- Insurance Premium Increases - Property insurance rates rising to account for higher rebuild costs
- Commercial Rent Adjustments - Property owners increasing lease rates to cover higher construction and maintenance costs
- Residential Rental Market - Higher building costs flowing through to rental rate increases
The Inflation Spiral Effect
- Cross-Industry Impact - Construction cost inflation affecting insurance, leasing, and broader economic sectors
- Demand-Side Market Persistence - Traditional economic dampening effects not materializing due to structural housing needs
