Schmid: AI spending pushes up housing financing costs, not Fed rate cuts

what happened

Making housing cheaper calls for better construction productivity, not for Fed rate cuts, said Kansas City Fed President Jeff Schmid at an affordability forum in Kansas City on Thursday. He cited a jump in the share of income needed to buy a median home: from 23% to 33% in metro areas and from 19% to 26% in rural areas between 2018 and 2024.

Schmid argued that building costs keep rising. Skilled labor, materials, financing and time all got pricier, while construction methods have hardly changed in decades. The average construction worker is now 42, up from 39 in 2000, and those over 55 make up 22%, more than double the earlier share. Fewer immigrants arriving is a further blow, since homebuilding has long leaned on foreign-born workers.

Competition for tradespeople is intensifying from manufacturing, energy and infrastructure, including the large AI buildout. Real pay for electricians has risen much faster than for other workers. The same AI investment wave is pushing up long-term real interest rates, which makes financing more expensive for builders. Permit and impact fees now take 3.3% of construction costs, against 1.9% in 1998.

Schmid gave an example: a five-month delay on a $10 million land loan costs $415,000 at today's 10% rates, versus $250,000 at 6%. His remedies include more factory-built modular homes, looser land-use rules and AI to speed plan reviews. He offered no help from the Fed itself, saying its price-stability mandate means setting rates for inflation across the economy, not favoring one sector.

why it matters

For markets, the speech shows how AI spending can lift long-term borrowing costs even in sectors far from tech, such as homebuilding. Schmid was explicit that the Fed puts economy-wide inflation ahead of any single industry.

market impact

Mortgages and homebuilders: higher long-term rates from AI investment raise the cost of construction financing

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