The Federal Reserve’s recent move to lower interest rates coupled with easing inflation signals a significant retreat in interest rate levels by the end of next, Ed Sullivan, chief economist and senior vice president of market intelligence for the Portland Cement Association said at the PCA’s annual meeting. The lowering of interest rates will benefit construction activity, Sullivan noted at the Aurora, Colo., meeting.
Sullivan shared the industry’s economic forecast for 2025 in his talk to cement company leaders. Sullivan said it will take time for the impact of the Fed’s policy pivot to materialize in the economy and construction. Near term, construction activity is expected to be burdened by oppressively high interest rates. As more rates cuts occur, construction loan rates are expected to decline, bringing positive development to the construction market. This is expected to begin by mid-2025.
Mortgage interest rates are expected to decline to 5.5 percent by mid-2025 and to 5 percent by the end of 2025, Sullivan said. The rate cuts will usher in favorable home affordability and a surge in consumer demand.
Lower rates will also usher in a significant increase in the supply of existing homes on the market. This is expected to more than offset the increase in demand and lead to a reduction in new and existing home prices, further enhancing affordability.
Nonresidential construction will also benefit from lower interest rates, Sullivan added. However, it will take time to improve occupancy rates and a higher Net Operating Income. These will come as the economy gains momentum next year. Given this, nonresidential is not expected to see recovery until 2026.
Also, public construction activity is expected to benefit from increased spending associated with the Bipartisan Infrastructure Law.
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