| CoStar Economy is produced this week by Christine Cooper, CoStar’s managing director and chief U.S. economist. October 28, 2026 I  The U.S. economy is sending conflicting signals, but they resolve along a clear fault line.Higher interest rates are weighing heavily on for-sale housing, where homebuilder sentiment has fallen to a 14-year low and pending home sales sit at a record low. Business investment tied to artificial intelligence, by contrast, keeps expanding, much of it funded from operating cash flow rather than debt. With the Federal Reserve expected to hold rates steady this week and further hikes likely by early next year, that divide is likely to persist, though higher rates are beginning to test the more leveraged corners of the AI buildout.For-sale housing is where tighter policy is doing most of its work. The 30-year fixed mortgage rate averaged 7.32% last week, up from 6.19% a year earlier, according to Freddie Mac. Oxford Economics estimates this year’s rise in rates has priced out another 5 million prospective buyers. Real residential investment fell 3.3% over the year ending in the second quarter, led by a 6.4% drop in single-family construction, according to data from the Bureau of Economic Analysis.Outside housing, the cycle looks very different. Real investment in information processing equipment rose 23.6% over the same period. In early 2024, spending on information processing equipment and software roughly matched residential investment; it now exceeds it by about $464 billion.  Higher rates have done comparatively little to slow this spending so far, particularly among the largest technology companies. Barclays estimates that hyperscalers are directing more than 90% of their operating cash flow to AI infrastructure, spending that does not depend on borrowing costs, and Oxford Economics notes that the industries leading the surge earn returns well above their cost of capital. More leveraged players are another matter. Specialized AI cloud providers, or neoclouds, such as CoreWeave borrow heavily to buy chips and other hardware that they lease to customers, leaving their economics exposed to financing costs. CoreWeave’s shares have fallen more than 50% from their May highs, and its bonds sold off earlier this month as hotter-than-expected inflation data raised concerns about borrowing costs. Analysts note, though, that a shortage of computing capacity is supporting the rental income that services that debt.The same divide is playing out in the labor market. Over the 12 months through September, industries tied to business investment, led by nonresidential construction and electrical equipment and machinery manufacturing, added roughly 181,000 jobs, according to the latest data from the Bureau of Labor Statistics. That is more than a third of all job gains over the year, from industries that employ less than 5% of U.S. workers — a sign of how heavily job growth now depends on the investment buildout. Housing-linked industries, from residential contractors to building material dealers and real estate firms, shed about 76,000.  The divide between winners and losers of higher interest rates runs through commercial real estate, though not always where expected. Rental housing appears to benefit from the same elevated rates that are freezing the for-sale market. According to CoStar data, multifamily absorption totaled nearly 500,000 units over the past year, and vacancy has fallen to 7.9% from a peak of 8.5% in late 2025. With the construction pipeline at its smallest in at least a decade, that tightening has room to run.Industrial demand has strengthened markedly. Net absorption reached 225 million square feet over the four quarters through September, more than 2.5 times the pace a year earlier, and vacancy declined in the third quarter for the first time in more than three years. Data centers are the most direct beneficiaries. CoStar tracks about 69 gigawatts of existing U.S. capacity , with another 43 gigawatts under construction, a pipeline equal to more than 60% of existing stock by power capacity. Vacancy remains near historic lows, and much of the capacity underway is preleased or purpose-built for hyperscale users. The boost is in equipment and data centers rather than factories, however: real investment in manufacturing structures fell 25.7% over the year ending in the second quarter. What we’re watching …The Fed raised rates in September for the first time in three years, to a range of 3.75% to 4%. It is widely expected to hold this week while signaling readiness to tighten further. Inflation expectations support that stance. The year-ahead measure in the University of Michigan’s Survey of Consumers stood at 4.7% in October, as higher energy costs threaten to spread to broader prices.For property markets, long-term rates matter more. Treasury yields have risen to their highest levels in decades, keeping upward pressure on cap rates and refinancing costs. Credit strain is also building. Private credit defaults, as measured by Fitch Ratings, have climbed to a series high of 6.3%, driven largely by interest deferrals and distressed maturity extensions.For now, higher rates fall hardest on rate-sensitive housing. But the longer they persist, the greater the risk that financing stress spreads to the more leveraged parts of the AI buildout. Posted with permission via CoStar |
