The Interest Rate Paradox: Why 7% Mortgages Aren't Crashing the Housing Market

The Expert Podcast

Episode Show Notes: The Interest Rate Paradox: Why 7% Mortgages Aren't Crashing the Housing Market

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