Image Source: CNBC
Mortgage rates are putting fresh pressure on an already fragile U.S. housing market. New September data showed that pending sales, housing starts and building permits all performed considerably worse than economists expected, raising concerns that the slowdown could deepen in the months ahead.
The latest figures arrive at a difficult moment for the Federal Reserve. Policymakers are weighing whether to raise interest rates again while continuing to battle persistent inflation. Normally, a weakening housing market could encourage the central bank to lower borrowing costs and support demand. This time, however, inflation remains the larger concern.
Mortgage Rates Trigger a Fresh Housing Warning
The National Association of Realtors reported that pending home sales fell 7.3% in September. The forward-looking measure, which tracks homes under contract but not yet completed, reached its lowest level in records dating back to 2001. Sales were down 11.3% from a year earlier, far worse than the 0.4% decline economists had anticipated.
Other housing indicators delivered similarly disappointing results:
- Privately owned housing starts dropped 5.2% from August, compared with expectations for a 0.4% decline.
- Building permits fell 0.2%, even though economists had forecast a 2% increase.
- Single-family permits declined 4% to 845,000, the lowest level since 2023.
“The housing market is about to go into a deep sleep,” Chris Rupkey, chief economist at Fwdbonds, said, warning that affordability must improve for activity to recover.
Rising Borrowing Costs Crush Affordability
Mortgage rates remained above 7% for most of September and ended the month near 7.6%, according to Mortgage News Daily. The current rate was later reported at approximately 7.43%. That compares with rates near 3% five years ago, when exceptionally cheap borrowing helped fuel a pandemic-era surge in home demand and prices.
Lawrence Yun, chief economist at the National Association of Realtors, said rapidly rising borrowing costs had weakened market conditions. While job growth and higher incomes can support home purchases, he noted that housing affordability is especially sensitive to changes in mortgage rates.
The impact is being felt by both potential buyers and sellers. Buyers face higher monthly payments, while existing homeowners are reluctant to sell because moving would mean giving up unusually low mortgage rates and taking on much more expensive debt.
More than 95% of mortgage borrowers have rates below current levels, and roughly 65% are at least two percentage points below prevailing rates. This “lock-in” effect has reduced housing turnover and limited the supply of existing homes available for sale.
Critical Fed Decision Complicated by Inflation
The housing slowdown would ordinarily strengthen the case for easier monetary policy. Lower interest rates can reduce mortgage costs, encourage home purchases and support construction. But the Federal Reserve is also dealing with stubborn price pressures.
Recent consumer and producer price reports offered little reassurance. Wholesale final-demand goods prices rose 2.6%, the fastest increase in a data series stretching back to December 2009. Fed officials are also monitoring whether heavy investment in artificial intelligence is pushing up prices for chips, electronics and other goods.
Markets expected the Fed to leave benchmark rates unchanged at its next meeting. However, futures pricing indicated a strong possibility of a quarter-point increase in December, followed by another hike in March 2027.
That outlook could keep mortgage rates elevated even if the central bank pauses temporarily. Housing analysts say affordability may become an increasingly powerful drag on sales, construction and residential investment.
Goldman Sachs Sees More Housing Pain Ahead
Goldman Sachs economist Ronnie Walker said affordability pressures could dominate the housing outlook in 2027. The firm expects residential investment to decline 2.5%, 4% and 1% over the next three quarters, with a sharper drop possible if borrowing costs fail to ease.
Goldman forecasts single-family housing starts of approximately 875,000 in 2027. Existing-home sales are expected to reach 3.9 million, roughly similar to 2026 but still 26% below 2019 levels before the pandemic disrupted the market.
Builder sentiment is already at its lowest level in 14 years, adding to concerns about new construction. The longstanding shortage of homes may prevent a complete collapse, but analysts say high mortgage rates are increasingly overpowering that support.
Yun offered one possible reason for optimism. Because mortgage rates have already risen substantially in response to expected Fed action, they may be close to a peak. If rates begin moving lower, some buyers and sellers who have delayed decisions could return to the market.
Frequently Asked Questions
Why are mortgage rates rising?
Mortgage rates are being influenced by inflation, expectations for Federal Reserve rate hikes and broader financial market conditions. Higher Treasury yields and expectations for tighter policy can push home loan costs higher.
How high are mortgage rates now?
The reported 30-year mortgage rate was approximately 7.43%, while the average ended September near 7.6%. Rates have remained above 7% for much of the period.
What happened to pending home sales?
Pending home sales dropped 7.3% in September and reached their lowest level in records dating back to 2001. The decline was significantly larger than economists had expected.
Will the Fed cut rates because housing is weakening?
Not necessarily. Although weak housing activity could support lower rates, the Fed is prioritizing its fight against persistent inflation. Officials may keep policy restrictive if price pressures remain elevated.
