Rising interest rates nationwide have put pressure on local developers, squeezing those needing financing to build housing and capping how much they can charge for homes.
“It’s really hard to get projects that pencil — that make financial sense to start,” said Phil Wuest, president and chief development officer at developer Ginn Group.
“What we’ve seen is there’s an upper limit in what we can charge,” Wuest said, adding that a homebuyer’s “purchasing power has been eroded.”
Still, the developer’s costs have risen with inflation. And as interest rates have increased, banks are offering tougher loan terms, impacting the volume of a project.
“It is a very challenging environment to get new development projects underwritten and approved,” Wuest said.
“The upshot can’t really be seen today,” he said. “The real impact will be in 2025-2027 when the lull in new project starts today will result in a dearth of new supply hitting the market in those years. That will exacerbate the existing supply deficit.”
Interest rates are higher than they’ve been in about two decades, said Noah Blanton, president of direct operations in Oregon for WFG National Title. His company closes about four out of every 10 home sales in Clark County. He also does economic forecasting for the local Building Industry Association.
Rising interest rates means that homeowners are not eager to put their homes on the market and take on a new, higher interest loan.
As of Wednesday, the average 30-year interest rate is 7.76 percent, according to the St. Louis Federal Reserve. This same week two years ago, the average rate was 2.98 percent.
“You can see the disincentive,” Blanton said.
With that low housing inventory, new construction makes up a larger proportion of home sales. And there’s less competition in the housing market.
Blanton expects higher interest rates to also impact the development of multi-family projects in the area.
Still, Blanton said that developers haven’t overbuilt or overdeveloped here. There’s still demand for housing, and prices have remained relatively stable given how much interest rates have risen.
National developers often don’t need to take out financing for projects and thus aren’t facing the same challenges as local developers.
The picture, he said, is much different from the housing crisis in 2008.
All of this paints a decent picture for demand for developers, Blanton said. Though, he does expect interest rates to impact the development of more multi-family projects.
But Blanton recognizes the incentive problems for local developers.
“If they can’t build and take risks at the current level of interest rates, that’s legitimate,” Blanton said.
