Builders Brace for Headwinds as Rates Ease Slightly in 2026

After several years of elevated borrowing costs, financial conditions are expected to ease modestly. The 30-year fixed mortgage rate recently dropped to 6.2% following $200 billion in mortgage-backed securities buybacks by Fannie Mae and Freddie Mac. NAHB projects mortgage rates will remain slightly above 6% in 2026 and trend unevenly lower as the Federal Reserve is expected to implement two 25-basis-point rate cuts, reaching a 3.25% terminal federal funds rate by the end of 2026.

“A sustained sub-6% mortgage rate will likely wait until 2027,” said Dietz.

For contractors, that means financing conditions may improve enough to keep projects moving—but not enough to trigger a rapid surge in new construction.

Supply Shortage and Cost Pressures Persist

Inflation remains a challenge, particularly in shelter costs, which are running at a 3.6% annual rate and continue to outpace broader consumer prices. With a nationwide shortage estimated at roughly 1.2 million housing units, economists emphasized that increasing supply remains critical to easing affordability pressures.

Builders, however, continue to face nearly 300,000 open construction jobs, underscoring ongoing labor shortages. NAHB estimates residential construction will need to add approximately 740,000 workers annually to keep pace with growth, retirements and turnover.

Material pricing also remains elevated, with building product costs rising above 3% growth rates since mid-2025 despite weaker residential construction activity. For mechanical contractors and trades, that combination of labor scarcity and material volatility continues to pressure project timelines and margins.

Single-Family Growth Modest; Multifamily Pulls Back

Single-family construction is expected to post slim gains in 2026, increasing 1% to an annual pace of 940,000 units, with a projected 5% gain in 2027. Townhouse construction continues to capture a growing share of the market, now exceeding 18%—a multidecade high.

In contrast, multifamily starts are forecast to decline 5% in 2026 to 392,000 units and fall another 6% in 2027. The slowdown follows pandemic-era highs that peaked at 547,000 units in 2022. Tighter financing conditions and higher construction costs are moving the apartment sector into a more constrained development cycle.

For plumbing and hydronic contractors, that signals steadier opportunity in single-family and attached housing, while large-scale multifamily work may remain softer in the near term.

Remodeling Remains a Bright Spot

The remodeling sector continues to outperform new construction. Home improvement spending now represents 45% of total residential construction activity, up from 33% in 2007.

Remodeling activity is projected to grow 3% in 2026 and an additional 2% in 2027 in inflation-adjusted terms. Long term, NAHB forecasts overall remodeling expenditures will be 19% higher by 2030 and 32% higher by 2035.

“The surge in home equity has allowed more home owners to finance remodeling projects that meet their needs, which include growth for aging-in-place remodeling projects,” said Dietz. “NAHB expects robust long-term remodeling growth, and projects overall remodeling expenditures will be 19% higher in 2030 and 32% higher by 2035.”

For contractors specializing in plumbing retrofits, hydronic upgrades and aging-in-place modifications, remodeling remains one of the strongest and most stable segments of the residential market.

Inventory Levels Shift Toward Balance

Existing home inventory has steadily climbed from a 2.3-month supply in 2021 to 4.1 months in 2025 — signaling movement away from an extreme seller’s market.

“We expect this rate to rise to a 4.6-months’ pace in 2026, which is in line with a balanced market range of between four and six months,” said Danielle Hale, Chief Economist at Realtor.com.

Realtor.com projects existing inventory rose 15.2% in 2025 and will increase another 8.9% this year. The median listing price in January 2026 was $399,900, down 0.1% year over year, reflecting moderating price growth.

The mortgage rate “lock-in effect” remains a drag, though it is gradually easing as a growing share of outstanding mortgages carry rates above 6%.

Buyer Confidence Hinges on Stability

Despite rates settling into the low-6% range, many prospective buyers remain cautious.

Zonda Chief Economist Ali Wolf pointed to policy uncertainty, job security concerns, insurance and maintenance costs as ongoing pressure points. Demographic trends show younger buyers—particularly Gen Z—are enthusiastic but constrained by affordability and student loan debt. Millennials are split between renters and equity-rich owners considering move-up purchases, while Gen X and baby boomers hold comparatively favorable existing mortgage rates and stronger balance sheets.

Wolf summarized the path forward in one word: stability.

“Stability from policymakers,” said Wolf. “Stability in the labor market so that people are confident that their job is safe and/or they can find a new one easy enough. Stability that interest rates will stay steady and won’t move lower, which would keep buyers on the sidelines. And stability in home prices so that a home will be a steadily appreciating asset. These are the market conditions that will move hesitant buyers off the sidelines.”

For contractors, that stability—in rates, pricing and labor—will ultimately determine how quickly sidelined demand converts into signed contracts.