Construction outlays drop 1.9% as higher mortgage rates pressure housing

A September pullback in residential spending highlights mounting strain as elevated borrowing costs curb both renovation work and new-home activity for brokers.

After nine months of 2026, mortgage rates have done more than cool home sales; they have also started to weaken the renovation market.

Construction spending fell 1.9% in September, almost reversing August’s upwardly revised 2.0% increase, as higher material prices and borrowing costs weighed on residential outlays, according to the Commerce Department’s Census Bureau.

Compared with the same month a year earlier, construction spending was down 2.7%, showing the cumulative effect of a rate climate that has offered little relief.

The figures pointed to a widening divide between parts of the construction industry that are still holding up and those that are losing momentum.

Private construction spending dropped 2.4% in September after rising 2.6% in August, with the residential side taking the biggest hit.

Spending on residential projects fell 5.5%, a decline economists linked largely to softer renovation spending, as higher mortgage rates continue to erode housing affordability and make homeowners more cautious about discretionary improvements.

Renovation slowdown reflects broader residential weakness

Renovation activity appeared especially vulnerable to rate pressure in September.

Spending on single-family housing projects was unchanged from the prior month but remained 2.4% below the level seen a year earlier, indicating that affordability pressures are affecting not only sales volumes but also how existing homeowners spend on their properties.

Outlays on multifamily units inched up 0.1%, although that segment represents only a relatively small portion of total construction output.

Private nonresidential construction rose 1.1%, helped by a 1.2% increase in power plant investment, while public construction slipped 0.1% as state and local government spending fell 0.3% and federal project spending advanced 2.5%.

War-related rate spike weakens broker pipeline

The residential slowdown in the third quarter of 2026 is tied to the jump in mortgage rates that followed the outbreak of the U.S.-Israeli war with Iran in late February, which fueled inflation and pushed borrowing costs sharply higher.

Freddie Mac data show that the average 30-year fixed mortgage rate has risen by at least 125 basis points since the conflict began, a move that has kept the U.S. housing market subdued through 2026 and narrowed origination pipelines for mortgage brokers across the country.

The September report suggests a housing sector that has struggled to regain traction throughout the year, as swings in rates repeatedly have undermined earlier momentum.

A further concern is El Niño. If the weather pattern pushes up commodity prices such as lumber and other building materials through year-end, it could add another inflationary pressure and delay any Federal Reserve rate relief into 2027.

For mortgage brokers, that would prolong the slump in purchase and renovation loan demand already reflected in the September numbers.