Interest Rates & Remodeling Market Trends (2025 and Historical Context)
Current interest rates are at their highest levels in over two decades, creating a very different environment from the low-rate era of the late 2010s and early 2020s. As of May 2025, 30-year fixed mortgage rates hover around 6.6%–6.8%, more than 2.5× higher than the record lows (~2.7%) seen in early 2021. The Federal Reserve’s aggressive rate hikes in 2022–2023 (to combat inflation) drove mortgage rates up from ~3% to over 7%, a level not seen since 2002. These elevated borrowing costs have drastically increased monthly mortgage payments (nearly 60% higher than three years ago), which in turn has influenced homeowners’ remodeling decisions.
Historically, interest rate cycles have corresponded with shifts in remodeling activity. Low interest rates typically spur more home improvement: homeowners can cheaply tap home equity or refinance to fund projects, and moving to a new home is also affordable – but during periods of cheap money, many chose to upgrade their current homes. In contrast, rising interest rates tend to cool housing turnover and make financing renovations more expensive, which can slow down remodeling growth. For example, during the COVID-19 pandemic, interest rates were slashed to historic lows and many people were stuck at home, leading to an unprecedented remodeling boom. U.S. home improvement spending ballooned from $404 billion in 2019 to about $611 billion in 2022 – roughly a 50% jump above pre-pandemic levels. This surge was fueled by cheap borrowing costs and high demand for better home spaces. By late 2022, however, as the Fed began raising rates sharply, the trend started to turn. Remodeling spending growth peaked at an astonishing ~17% year-over-year in Q3 2022, and then decelerated rapidly thereafter.
Remodeling Spending Forecast vs. Reality (2024–2025)
In late 2023, Harvard’s Joint Center for Housing Studies projected that home improvement spending would decline by 7.7% by Q3 2024. However, actual data showed the downturn was milder than expected. Remodeling expenditures fell only 2–3% year-over-year at the lowest point in late 2024, with total spend hovering around $451 billion—down modestly from $463 billion the prior year. By early 2025, annual growth turned positive again, and the industry is now projected to reach $509 billion in spending by year’s end. Harvard and NAHB analysts confirm that the contraction was “modest and short-lived,” with the sector returning to growth, driven by strong homeowner equity, aging housing stock, and a desire to renovate in place.
Looking ahead, there are signs the worst of the remodeling dip may pass as the market adjusts. By 2025, interest rates have at least plateaued (the Federal Reserve paused rate increases), and if inflation eases, modest rate relief might follow. The Leading Indicator of Remodeling Activity (LIRA) as of April 2025 predicts a return to modest growth – about +2.5% in renovation spending through early 2026, climbing to a new record $526 billion by Q1 2026. This uptick follows the 2024 slowdown and is premised on factors like a solid job market, high home equity, and pent-up demand. Still, any recovery is expected to be gradual. In summary, the current high-rate environment has cooled the red-hot remodeling market of 2020–2022, but underlying fundamentals (aging housing stock, accumulated equity, and unmet project demand) suggest the industry will remain robust once interest rates stabilize.
Local Effects: Sacramento vs. California & National Patterns
Interest rates’ impact on remodeling is being felt in Sacramento, but with some local twists. Sacramento’s housing market experienced a pandemic-era surge in demand (as Bay Area buyers sought affordability), which boosted home values and remodeling activity. Now, with interest rates high, Sacramento homeowners face the same lock-in effect seen across the country – perhaps even more acutely in California. A whopping 81% of California homeowners have mortgages below 5%, while new buyers face ~7% rates. This huge gap means many Sacramentans are reluctant to sell their homes (and give up their low interest loans). Instead, they’re choosing to “stay put” in record numbers. With few homes for sale in the area, would-be movers are often becoming remodelers, opting to improve their existing homes to meet their needs rather than buying new. That might include new home construction projects built with modern efficiency and long-term living in mind.
Sacramento thus mirrors a broader California and U.S. trend: high interest rates are suppressing home sales but keeping remodeling demand somewhat resilient. Local contractors report that homeowners with ultra-low mortgage rates (often under 3–4%) are upgrading kitchens and bathrooms instead of “trading up” to a new house with a 7% mortgage. As one industry expert explained, higher interest rates “depress home sales” but lead consumers with fixed low-rate mortgages to “improve what they own versus trading up”. This dynamic is evident throughout California, but especially in family-friendly markets like Sacramento where people put down roots. In fact, a recent national survey found 55% of homeowners would rather renovate their current home than move (only 24% would prefer to move) – a sentiment likely shared by many in the Sacramento region.
On the other hand, remodeling activity hasn’t been immune to economic headwinds in Sacramento. The combo of rising interest rates and high construction costs led to a noticeable slowdown in some residential projects in 2023. For instance, new housing construction in the City of Sacramento dipped (permits for new units fell ~7.5% in 2023) as developers struggled with higher financing costs. While that statistic is about new homes, it signals a general cooling of the local housing-related investment climate. Remodeling permit data is harder to come by, but anecdotal evidence suggests Sacramento remodelers saw more cautious consumer behavior in late 2022–2024 – for example, homeowners seeking multiple bids or phasing projects in stages to manage costs. Statewide trends also point to a slight softening in home improvement spending after the pandemic peak. The National Kitchen & Bath Association (NKBA) notes that California (along with the Northeast) is expected to see some of the strongest kitchen/bath remodel growth longer-term, yet in the near term 2024 spending on kitchen and bath remodels is forecast about 2–3% lower than 2023. In numbers, that means California’s huge kitchen/bath market is pulling back slightly (the NKBA projects CA residential kitchen & bath remodeling at roughly $66–67 billion in 2024, a 2% dip). Sacramento’s mid- to high-end remodel segment likely follows this path: still very active by historical standards, but off the highs of the frenzy seen when money was virtually free.
In summary, Sacramento’s remodeling landscape in 2025 reflects a balance of forces. On one side: high interest rates have cooled new development and made homeowners budget-conscious, leading to slight declines in overall remodeling volumes. On the other: the region benefits from California’s strong housing equity and limited supply, which encourages homeowners to reinvest in their existing houses. Compared to national patterns, Sacramento/California remodelers are similarly weathering a market plateau – not crashing, but flattening after a boom. The fundamental drivers (aging housing stock, high home values, migration into the area) remain, so once interest rates stabilize or fall, Sacramento could even outpace the nation in remodel growth due to that pent-up demand. For now, contractors in the area report steady but more competitive business, with clients increasingly cost-conscious in the high-rate economy.
Consumer Behavior & Remodeling Demand (Kitchens and Baths)
Interest rates strongly influence homeowner behavior and demand for remodeling, particularly big-ticket projects like kitchen and bathroom renovations. High rates affect consumers’ ability to finance projects and their willingness to undertake discretionary upgrades. In the current climate, several noteworthy patterns have emerged:
- “Improve Instead of Move”: Perhaps the most significant trend is that many homeowners are choosing to renovate their current homes rather than buy new ones, specifically because of high interest rates. Surveys in 2024 found 84% of homeowners in the market for a new home said rising rates affected their decision, and a large share have stopped looking. With the cost of a new mortgage so high, these families often redirect their plans (and budgets) toward improving what they have. This is especially true for those sitting on low-interest mortgages. For example, roughly 83% of U.S. homeowners with mortgages have rates under 6% (and over half under 4%) – they’re “locked in” at cheap financing. It’s a classic case of the golden handcuffs: giving up a 3% mortgage for a 7% one to buy a different house is unappealing, so they remodel their kitchen or add that new bath instead of moving. Mid- to high-end kitchen and bathroom remodels are prime beneficiaries of this trend, as those are the projects that make an existing home feel new. A senior economist summarized it well: “When people don’t move, they renovate.”
- Financing Caution & Project Postponement: On the flip side, high interest rates have made homeowners more cautious about financing remodels and in some cases delayed projects. Many people fund renovations through loans like home equity lines, cash-out refinancing, or personal loans. Now, with interest rates up, these options are less attractive. For instance, using a home equity line of credit or refinance in 2023–2025 means paying perhaps 7–9% interest, compared to ~3–4% just a few years ago. It’s no surprise that the share of people willing to refinance their primary mortgage to finance improvements has plummeted – only 9% of homeowners plan to use a cash-out refinance for a project in 2024, down from 24% the year before. Homeowners are clearly “avoiding lending options that would impact the rate on their primary mortgage”. Instead, those who do borrow often opt for a standalone home equity loan (keeping the original mortgage untouched), or they put projects on hold if they can’t pay cash. A Discover Home Loans survey in 2024 found 33% of homeowners are choosing to delay renovation projects due to inflation and high costs. Among those moving forward with remodels, nearly half said the project ended up costing more than expected, and about 30% scaled back the scope to stay on budget. This indicates that sticker shock – partly from higher material costs and partly from higher financing costs – is tempering how freely homeowners spend on upgrades. In practical terms, a Sacramento client who in 2021 might have financed a $80,000 dream kitchen remodel with a low-interest loan may, in 2025, either postpone that project or reduce it to a $50,000 remodel done in phases, unless they have ample savings.
- Persistent Demand for Home Upgrades: Despite the headwinds, it’s important to note that remodeling demand remains historically high. Americans’ mindset toward their homes shifted during the pandemic, and even with tighter finances, that focus on home improvement is strong. In late 2023, 50% of homeowners said they planned to spend about the same on home improvements in the coming year despite rising rates, while roughly 22% planned to spend more. Only about 28% said they would cut back. So while growth has slowed, there isn’t a freefall in demand – many households still prioritize updating kitchens, bathrooms, and other spaces, seeing it as an investment in comfort and value. In fact, over 57% of homeowners nationally either had a renovation in progress or planned to start one within a year (as of 2024). The motivations go beyond just avoiding a move: 87% said they want to refresh their home’s style, 73% want to upgrade aging features (a common case for bathrooms/kitchens in older homes), and a striking 84% view home improvements as an investment opportunity. This investment mentality is notable for higher-end projects – homeowners believe a quality kitchen or bath remodel will pay off in terms of resale value or enjoyment, and they are willing to proceed when they can. Indeed, in Sacramento’s mid- to high-end market, many clients are dual-motivated: they want a luxurious, modern kitchen for themselves and they know it will bolster their home’s value in an area where prices have risen.
- Economic Confidence and Scope of Projects: Interest rates don’t operate in isolation; they feed into general economic sentiment. When borrowing costs are high, consumers often feel less confident, which can shrink the pipeline for large discretionary remodels. Home remodeling contractors have observed some homeowners cite broader economic worries (like talk of recession or even election-year uncertainty) as reasons to hold off on “nice-to-have” upgrades. For example, a homeowner might defer a deluxe master bathroom remodel if they’re worried about job stability or if their stock portfolio is down. In 2024, remodelers nationwide still reported overall positive market sentiment (an index reading of 63, which is well above “good” threshold 50) but also acknowledged these headwinds and hesitations. In practical terms, this has meant fewer spontaneous high-end remodels and more planning/price shopping. Clients are asking for detailed quotes and value-engineering options (like cheaper material alternatives) more than they did when money was cheap. Nonetheless, critical needs and strongly desired upgrades are still moving forward – just with more careful consideration of financing and costs.
Consumer behavior in the kitchen and bath remodeling sector has bifurcated under high interest rates: a cohort of homeowners is pressing ahead with renovations because they’re not moving (and they value their home life highly), while another cohort is tapping the brakes on projects due to financing concerns and economic caution. For a Sacramento home remodeling contractor focusing on mid/high-end projects, this means business is still there – clients still want that beautiful new kitchen or spa-like bathroom – but closing deals may take more effort as clients weigh costs. The story is similar among Seattle’s trusted home remodeling experts, where interest rate headwinds are being met with smart design and scope adjustments.Offering creative financing options (e.g. same-as-cash 0% financing for 12–18 months) or demonstrating the long-term value of a project can help convert the cautious customers. Overall demand for remodeling remains healthy by historical standards, but today’s homeowner is more strategic and cost-conscious, given the interest rate climate.
Contractor Financing & Business Operations in a High-Rate Environment
Interest rates don’t just affect homeowners; they also have a direct impact on contractors and how they run their businesses. For a remodeling contractor in Sacramento (or anywhere), the cost of money has risen across the board. This influences everything from taking out a loan for a new piece of equipment to the financing packages you can offer clients. Key effects on contractors’ finances and operations include:
- Higher Cost of Business Loans and Credit: Contractors often rely on lines of credit, business loans, or credit cards to bridge cash flow – for example, purchasing materials upfront, financing a work truck, or covering payroll while awaiting client payments. As interest rates have climbed, these financing costs have increased substantially. In late 2024, average small business loan interest rates ranged roughly from 6.5% to 11.7% at banks, whereas a few years prior rates might have been in the low single digits. The prime rate is around 8.25–8.5% in 2025, meaning any borrowing by a contractor likely comes at high interest. For example, if a Sacramento home remodeler took a $100,000 business expansion loan, the annual interest might be $10,000 or more now, vs. perhaps $4,000 during the ultra-low rate era. This squeezes profit margins unless costs are passed on. Many contractors have responded by being more judicious with debt – leasing equipment or delaying capital investments, and using more of a pay-as-you-go model. Some are negotiating better terms with suppliers or asking for larger initial deposits from clients to reduce the need for credit. Overall, the cost of working capital has roughly doubled, which is a significant operational headwind.
- Project Financing for Clients: In home remodeling, especially larger kitchen/bath projects, contractors often help facilitate financing for clients. Companies might partner with a lender to offer promotional loans (such as “12 months no interest” or long-term payment plans). High base interest rates make these financing deals more expensive for the financing providers, which can result in less attractive terms for clients or higher fees for contractors. For instance, a 0% APR promotion typically means the contractor pays a fee to the lender – those fees rise when rates are high. Some Sacramento remodelers have adjusted: shorter promo periods, slightly higher APR after the promo, or minimum purchase requirements. The net effect is that financing promotions aren’t as dirt-cheap as before, which can reduce clients’ willingness to green-light a project. However, many clients still seek financing, so contractors often keep options available – whether that’s home equity loans (~8%+), personal loans, or credit union products. Still, “finance my remodel” is no longer an easy sell – it requires more explanation and sometimes creative structuring (e.g., splitting a project into phases that can be paid in cash chunks).
- Impact on Contractor Cash Flow and Pricing: With interest rates up, carrying costs for any project delays or extended timelines increase. If a remodel runs over schedule, and the contractor’s capital is tied up longer, that effectively costs more now. This has pushed contractors to tighten project management to avoid overruns. Some are including escalation clauses or shorter bid validity periods in contracts due to volatile financing and material costs. Many Sacramento contractors have raised prices over the past two years to cover higher materials, labor, interest on loans, and insurance. For example, general liability insurance tied to revenue may become a cost pressure if project volume dips. It’s a balancing act to stay competitive in pricing for cost-sensitive clients, yet cover rising overhead. The most successful remodelers are managing expenses closely and taking a leaner approach – delaying non-essential hires or purchases until market conditions improve.
- Ability to Expand or Invest: The high cost of capital in 2025 also affects strategic growth. A Sacramento remodeling firm that might have opened a showroom or launched a new service line when borrowing was cheap may now postpone those plans. Expansion, hiring, and equipment upgrades are slower across the industry. However, companies with strong cash reserves or that thrived during the 2020–2022 boom are still positioned to invest and gain market share. Conversely, newer or under-capitalized contractors might struggle and some may exit or consolidate. Builders specializing in DADU and new home construction are finding that streamlined designs and phased projects are more appealing to today’s cost-conscious buyers.
The upside for established remodelers is less competition entering the market when interest rates are high, helping to reduce crowding in the local space.
In essence, high interest rates are a “new cost” that both contractors and clients have to factor in. For contractors, it means running a tighter financial ship: adjusting payment schedules (e.g., more frequent draws to maintain cash flow), managing debt carefully, and setting realistic client expectations. A proactive remodeler might say: “If you’re planning to finance this remodel, let’s look at monthly payments at today’s rates and align the scope accordingly.” By adapting this way, Sacramento kitchen and bath remodeling contractor can continue to thrive even when borrowing is no longer cheap.
Effects on Material Costs and Pricing of Remodels
The surge in interest rates over the past two years has been intertwined with inflation dynamics, which directly affect material costs and project pricing in the remodeling industry. Initially, interest rate hikes were a response to high inflation in materials and goods; now those higher rates are helping cool off some cost increases. For a contractor and clients, this has translated into a mix of good news and bad news on the cost front:
- Material Cost Inflation Has Cooled: After a period of eye-popping price spikes for building materials in 2021–2022, the pace of increases has dramatically slowed, partly due to the Federal Reserve’s tightening (which dampened construction demand). In 2023, building material prices essentially leveled off. The overall cost of residential construction inputs rose only ~1.3% in 2023, a huge relief compared to the 15% jump seen in 2022. Many key materials even got cheaper in 2023:
- Softwood lumber (used in framing and cabinets) saw prices drop about 31% in 2023. This correction came after lumber’s extreme pandemic spike and was driven by slower housing construction and higher interest rates pricing some projects out. Even after this drop, lumber was still ~23% above 2019 levels, but far below its peak.
- Gypsum (drywall) prices decreased ~2% over 2023, following a massive 44% rise during 2021–2022. Drywall costs stabilized as new construction cooled.
- Steel products (used in beams, hardware, appliances) also fell – the PPI for steel was down ~16% in 2023 after big increases earlier.
- Other finishes: Products like paint, fixtures, and tile saw flatter price trends in 2023 as supply chains improved and demand moderated. Many Sacramento contractors noticed shorter lead times for cabinets and appliances, and some supplier prices even came down or at least stopped rising by late 2023.
- Persistent High Costs in Some Areas: Not all costs responded to interest rates in the same way. Certain materials continued to climb in price due to other forces. For example, ready-mix concrete – crucial for foundations or additions – rose about 11% in 2023 after a similar jump in 2022. This increase was driven by fuel and labor costs and regional shortages. Similarly, labor costs for remodeling remain high due to a longstanding skilled labor shortage. Even with fewer new homes being built, many contractors still have backlogs and can’t find enough electricians or tile setters. High labor and certain material costs mean that overall project pricing for clients is still higher than a few years ago, even if some materials are cheaper.
- Contractor Pricing Strategies: With material inflation slowing or reversing for some items, contractors have tried to hold the line on bid prices to stay competitive. Some were able to avoid further price hikes in 2023–2024. However, savings from materials have often been offset by rising financing and labor costs. As a result, project estimates in 2025 are roughly steady with 2023 levels after steep increases in 2021–2022. For example, a mid-range hall bathroom remodel in Sacramento might still cost about $30,000 in 2025 – similar to 2023. Essentially, interest rate hikes “cooled off” the cost boil in materials, preventing further runaway inflation in renovation pricing.
- Volatility and Uncertainty in Pricing: One side effect of the current environment is greater volatility in forecasting project costs. While interest rates slowed demand, new factors like 2025 trade tariffs caused upticks in material prices again (annualized ~9.7% rate in Q1 2025). This reminds contractors and homeowners that global and policy factors can swing material costs independent of domestic interest rates. Many contractors now build contingencies into budgets, lock in prices early with suppliers, and shorten the validity of quotes. For homeowners, this means we’re no longer in runaway inflation, but it’s still wise to include a buffer in the remodeling budget. The good news is many product availability issues have resolved, but price certainty is still not fully back.
Interest rate hikes have had a cooling effect on many remodeling material costs, which is a silver lining for contractors and clients facing higher financing costs. A Sacramento kitchen remodel today might benefit from lumber and plywood being cheaper than a year ago, even as borrowing money for that project is pricier. Contractors have largely adjusted their pricing to reflect a stabilized material market – we’re not seeing the monthly escalation clauses that were common when everything was 10% more expensive every quarter. However, overall remodeling project prices remain high compared to pre-pandemic levels, because cumulative inflation (materials, labor, etc.) hasn’t been fully reversed. High interest rates curtailed further inflation but didn’t roll prices back. For clients, the takeaway is that a high-end kitchen or bath remodel in 2025 may be the most expensive it has ever been in absolute terms, but at least costs aren’t rising uncontrollably – and a savvy contractor may find small savings to help offset financing impacts.
Interest rates have become a defining factor in the home remodeling industry’s current cycle. For a Sacramento kitchen and bathroom remodeling contractor, understanding this landscape is crucial. High interest rates have cooled the once-scorching demand slightly, led homeowners to renovate in place rather than relocate, and made both clients and contractors more cost-conscious. Sacramento’s local market reflects these shifts while still benefiting from California’s strong housing fundamentals. Homeowners are balancing their dreams of updated kitchens and bathrooms against the reality of higher borrowing costs – many proceed, but often with more planning or scaled expectations. Sacramento contractors, in turn, are adapting by managing their financing, seeking stable material suppliers, and sharpening their pricing strategies — including services like contractor licensing to stay compliant and competitive.
Ultimately, the mid- to high-end remodeling segment remains a promising arena even in a high-rate environment. People’s desire to improve their homes is enduring, and factors like aging housing stock, accumulated home equity, and limited new housing supply will continue to drive projects. Interest rates may ebb and flow, but quality home improvements – a beautiful kitchen renovation or a modernized bathroom – provide lasting value that homeowners recognize. By staying attuned to interest rate impacts on consumer behavior, adjusting business practices, and leveraging the easing of material cost pressures, Sacramento home remodelers can navigate 2025’s challenges and position themselves for the next wave of growth when interest rates eventually retreat. The industry’s current pause is widely seen as just that – a pause, not a full stop – and those in the remodeling business who plan smartly now are likely to reap the benefits when the economic winds turn more favorable.
