September housing data deteriorated further, according to separate reports Tuesday, as the Federal Reserve considered additional interest rate hikes. If the Fed raises short-term rates as expected over the next several months, mortgage rates already at 7.43% could rise further and reduce affordability. Higher home borrowing costs have coincided with a general rise in inflation and a housing shortage.
The National Association of Realtors said pending home sales reached an all-time low in records dating to 2001. The index measures home sales under agreement but not completed. The index fell 7.3% in September, compared with Wall Street expectations for a 0.4% decline. The index was down 11.3% from a year earlier.
Commerce Department data showed privately owned housing starts fell at a seasonally adjusted annualized rate of 5.2% for the month, against an expected 0.4% decline. Commerce Department data showed building permits fell 0.2%, compared with the Dow Jones consensus forecast for a 2% increase. Single-family permits totaled 845,000, down 4% from August and the lowest number since 2023.
NAR chief economist Lawrence Yun said fast-rising mortgage rates weakened market conditions in September. Yun said mortgage-rate changes affect housing affordability more than job growth and income gains can support home purchases. Mortgage News Daily said the 30-year mortgage rate exceeded 7% for most of September. Mortgage News Daily put the rate at around 7.6% at the end of September. Mortgage rates were closer to 3% five years ago, helping fuel the Covid-era boom in housing demand and prices. Home builder sentiment is at lows not seen in 14 years. Fwdbonds chief economist Chris Rupkey warned that housing activity would slow sharply unless Washington changed policies to make new homes more affordable.
Under some conditions, Fed officials might respond to housing weakness with easier monetary policy. Lower rates generally stimulate demand by reducing borrowing costs. However, the Fed could prioritize controlling inflation over supporting housing. Consumer and producer price readings last week offered few signs of optimism. Wholesale final demand goods prices rose 2.6%, the fastest pace in a Bureau of Labor Statistics data series dating to December 2009. Fed officials have said the officials are tracking inflationary effects from robust artificial intelligence investment, which is raising chip and electronics costs. Fed officials believe benefits from AI investment could offset weakness in sectors such as housing.
Goldman Sachs economist Ronnie Walker said in a client note Monday that housing would likely weaken further before stabilizing. Walker expects affordability constraints, renewed by the recent mortgage-rate rebound, to increasingly weigh on activity in 2027. Walker said sustained higher mortgage rates would have the greatest impact on housing turnover. Walker said the recent rate increase would likely push existing home sales lower in the coming months.
More than 95% of mortgage borrowers have rates below the prevailing level. Among mortgage borrowers, 65% have rates 2 percentage points below the prevailing level. Goldman Sachs forecasts residential investment declines of 2.5%, 4% and 1%, respectively, over the coming three quarters, with potentially steeper declines if mortgage rates do not fall. Goldman Sachs forecasts 875,000 single-family housing starts in 2027, little changed from this year. Goldman Sachs forecasts 3.9 million existing home sales in 2027, about the same as in 2026 but 26% below pre-Covid 2019 levels. Walker attributed the subdued activity to higher borrowing costs discouraging current homeowners from moving and deteriorating affordability weighing on new construction. Walker said affordability constraints have limited housing activity in recent years, while the longstanding housing shortage has limited declines.
Markets expect the Fed to hold benchmark rates steady at next week's meeting. CME Group's FedWatch tool shows futures pricing implies a strong chance of a quarter-percentage-point hike in December. The tool also implies a strong chance of another quarter-percentage-point hike in March 2027. However, Yun said mortgage rates could be topping out because mortgage rates have already risen much more than the Fed's short-term rate increases. Yun said buyers and sellers may be waiting for mortgage rates to move favorably.
U.S. Housing Market Deteriorates Amid Rising Mortgage Rates and Fed Rate Hike Speculation
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Summary
U.S. housing activity slumped in September amid rising interest rates and expectations of further Fed tightening. Pending home sales dropped 7.3% month-on-month to a record low, per the National Association of Realtors. The Commerce Department reported a 5.2% decline in housing starts and a 4% fall in single-family permits, the weakest since early 2023. Mortgage rates hit 7.43%, with the 30-year rate above 7% for much of the month, squeezing affordability. Goldman Sachs expects continued weakness, forecasting lower existing home sales and falling residential investment through early 2024. Markets are pricing in a quarter-point rate hike in December and again in March 2027, as funding rates remain a key concern.
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