The US housing market weakened further in September, with pending home sales falling to their lowest level since records began in 2001. Housing starts and building permits also came in below expectations. Mortgage costs remain high, while inflation has yet to ease clearly, leaving markets to weigh the prospect of further Federal Reserve rate hikes against mounting pressure on housing affordability and activity.
Pending sales hit a record low as starts fall
The National Association of Realtors said its pending home sales index dropped 7.3% from August and 11.3% from a year earlier. The index tracks homes under contract but not yet closed and is generally viewed as a leading indicator of existing-home sales. Economists had expected a monthly decline of just 0.4%.
Separate data from the Commerce Department showed privately owned housing starts fell 5.2% in September, at a seasonally adjusted annual rate. That was a steeper decline than the 0.4% decrease forecast by the market. Building permits slipped 0.2%, against expectations for a 2% increase. Permits for single-family homes fell 4% from August to 845,000, their lowest level since 2023.
NAR Chief Economist Lawrence Yun said the rapid rise in mortgage rates had weakened market conditions in September. Job and income growth can support homebuying demand, he said, but affordability is more sensitive to changes in mortgage costs.
Mortgage costs stay high as inflation limits Fed options
The 30-year fixed mortgage rate was above 7% for most of September and stood at about 7.6% at month-end, according to Mortgage News Daily. Five years ago, rates were close to 3%. Those lower borrowing costs helped fuel homebuying demand and price gains during the pandemic; today, higher rates make homes harder for prospective buyers to afford.
A cooling housing market would normally strengthen the case for easier monetary policy, since rate cuts can reduce borrowing costs and support demand. But the Fed is still contending with inflation. Consumer and producer price data released last week offered no clear sign of relief. Wholesale prices for final-demand goods rose 2.6%, the fastest increase in the Bureau of Labor Statistics' series since it began in December 2009.
Fed officials are also watching how investment in artificial intelligence could affect inflation. Spending in the sector has pushed up the cost of chips and electronics. Officials have also argued that the economic gains from AI investment could offset weakness in sectors such as housing.
High rates could weigh further on housing turnover
Goldman Sachs economist Ronnie Walker said in a client note on Monday that the housing market could weaken further before stabilizing. He expects the affordability strain from the recent rebound in mortgage rates to become more pronounced in 2027. Persistently high rates are particularly affecting housing turnover, and existing-home sales could continue to decline in the coming months, he said.
More than 95% of current mortgage borrowers have rates below today's levels, with 65% at least 2 percentage points lower, Goldman Sachs said. This “lock-in effect” discourages some homeowners from moving and taking on a more expensive mortgage. At the same time, deteriorating affordability is restraining demand for newly built homes.
The firm forecasts residential investment will fall 2.5%, 4% and 1% over the next three quarters. The declines could be larger if mortgage rates do not retreat. For 2027, Goldman Sachs expects single-family housing starts of 875,000, roughly in line with this year, and existing-home sales of 3.9 million. That would be close to the 2026 level but 26% below 2019, before the pandemic.
Walker said housing activity has remained in a narrow range in recent years: a shortage of homes provides support, while affordability pressures limit growth.
Markets weigh the Fed's next rate moves
Markets expect the Fed to leave its benchmark rate unchanged at next week's meeting. However, pricing tracked by CME Group's FedWatch tool indicates that futures markets see a significant chance of a 25-basis-point rate increase in December, with another increase possible by March 2027. Further policy tightening could add to upward pressure on already-high mortgage rates.
Yun said mortgage rates have already risen considerably more than the increase in the Fed's short-term rates, suggesting they may be near a peak. Buyers and sellers may be waiting for rates to move in a more favorable direction, he said. September's pending-sales, housing-starts and permit figures all point to pressure on the market; whether mortgage rates stabilize will be important for home sales and construction activity ahead.