Construction demand is shifting, not disappearing

Reading the economic tea leaves isn’t always easy, but understanding trends and new developments allows you to plan ahead and respond more effectively to changing conditions. 

These insights can give your contracting company an edge over the competition, too. Here, NAHB economist Eric Lynch, CBE, explains current trends that show us where opportunity lies in 2026.

—Interview by Margot Lester, edited by Bianca Prieto

How does recent data showing people are worried about jobs and finances affect contractors? 

If [consumers are] uncertain about their current job situation or future prospects, then they are less likely to make larger purchases, like a home. This has depressed consumer demand for housing, creating a difficult sales environment for homebuilders, and is why the NAHB/Wells Fargo Housing Market Index (HMI) has been in negative territory since April 2024. 

To help move potential homebuyers off the sidelines, homebuilders have been leaning into incentives. Larger builders can use their economies of scale to offer more options, like mortgage rate buydowns or price reductions. Smaller builders, facing more financing constraints for builder and developer loans, have smaller profit margins and more limited business options in this regard.

What's one way contractors can use consumer sentiment for planning?

Builders need to focus on the areas with growth potential. Two areas of the market that saw positive developments in 2025 are townhomes and custom homes. Given the continued rise of construction costs, townhomes are becoming a more common source of “starter homes”, increasing affordability especially for first-time homebuyers. Also, townhomes are an easy way to implement light-touch density projects within neighborhoods, helping to alleviate housing shortages in many areas.

Since custom homebuyers are more likely to use cash for purchases, [buyers] are less interest-rate-sensitive, which is an advantage in the current mortgage environment. Additionally, custom homebuyers are more likely to experience wealth effects based on the recent stock market performance, helping to fuel growth in this submarket.

Where else can contractors look for more or new business?

When looking at the age distribution of the population, millennials are the largest living generation, and they are reaching their peak home-buying years, which will spur future housing demand. It’s important to remember that they might not have the same preferences and tastes as previous generation cohorts. This is why I recommend that homebuilders check out “What Home Buyers Really Want”, produced by the Economics & Housing Policy team here at NAHB. 

I mentioned previously that the NAHB/Wells Fargo HMI has been in negative territory for close to two years. The same is not true for the NAHB/Westlake Royal Remodeling Market Index, which has been in positive territory since mid-2020.

The remodeling sector has many favorable demand factors, such as the increasing age of the current housing stock, wealth accumulation from recent home price appreciation and increased preference for older existing homeowners to age-in-place. Furthermore, we have seen remodeling steadily continue to take a larger share of all residential building construction firms and employees.

These factors are long-term determinants, which means that it will take time for any of them to reverse course. This is why NAHB is forecasting a bright future for remodeling in the coming years. If builders are looking to diversify their business, they should seriously consider adding remodeling to their portfolio of services.

What other economic factors should contractors follow?

This is an important year for the Federal Reserve, especially with Jerome Powell’s term as chair ending in May and continued questions surrounding its independence. The direction of monetary policy does impact the home building industry, especially since the housing sector is rate-sensitive.

While the Federal Funds Rate does not correlate well with the 30-year fixed rate mortgage, it has a direct impact on acquisition, development and construction financing since around 60% of starts are undertaken by private homebuilders. Unlike mortgage rates, a change in the Federal Funds rate has an almost one-to-one relationship with this prime rate. NAHB is forecasting multiple cuts this year, which should help to loosen up financing conditions for homebuilders. “Uncertainty” was the buzzword for 2025. If we can drop the first two letters in 2026, builders will be able to build more, improving housing opportunities for all.

See what other construction leaders predict for 2026.

Thanks for reading today's edition! You can reach the newsletter team at thelevel@mynewsletter.co. We enjoy hearing from you.

Interested in advertising? Email us at newslettersales@mvfglobal.com

Was this email forwarded to you? Sign up here to get this newsletter once a week. 

The Level is curated and written by Margot Lester and edited by Bianca Prieto.