The U.S. housing market weakened further in September while inflation remained elevated, complicating the Federal Reserve’s decisions on the path for interest rates. Several housing indicators deteriorated at the same time. If short-term rates continue to rise in the coming months, mortgage rates already near 7.43% could move higher, putting additional pressure on home affordability and residential activity.
Lawrence Yun, chief economist at the National Association of Realtors, said September’s housing conditions were weighed down by rapidly rising mortgage rates. Employment and income growth continue to provide some support for would-be buyers, but housing affordability is more sensitive to changes in borrowing costs.
Pending Home Sales Hit a 2001 Low
The National Association of Realtors’ pending home sales index tracks residential properties under contract but not yet closed, making it an important leading indicator for existing-home sales. The index fell 7.3% month over month and 11.3% from a year earlier in September, reaching its lowest level since records began in 2001. Economists had expected a decline of just 0.4%.
Data from the U.S. Commerce Department showed private housing starts fell 5.2% at a seasonally adjusted annual rate, well below expectations for a 0.4% decline. Building permits fell 0.2%, compared with a 2% increase expected in a Dow Jones survey. Permits for single-family homes totaled 845,000, down 4% from August and the lowest level since 2023.
Homebuilder confidence also fell to a level not seen in 14 years. Chris Rupkey, chief economist at FWDBONDS, said the housing market could move deeper into stagnation unless U.S. policy changes significantly and lowers the cost of building new homes.
Mortgage Rates Above 7% Keep Buyers and Sellers on Hold
Mortgage News Daily data showed that the average rate on a 30-year fixed mortgage remained above 7% for most of September and stood at about 7.6% near the end of the month. Five years ago, the rate had briefly approached 3%, helping drive strong housing demand and rapid price gains during the pandemic.
Higher mortgage rates are affecting not only potential buyers but also existing homeowners considering a sale or move. More than 95% of mortgage borrowers have rates below current market levels, and about 65% are paying rates at least two percentage points lower. Selling and taking out a new mortgage would therefore expose many homeowners to substantially higher financing costs, creating what the market calls a “lock-in” effect.
Goldman Sachs economist Ronnie Walker said in a client report that housing could continue to weaken before stabilizing. Goldman expects residential investment to decline by 2.5%, 4% and 1% over the next three quarters, respectively. The contraction could be deeper if mortgage rates do not retreat.
Goldman forecasts roughly 875,000 single-family housing starts in 2027, little changed from this year. Existing-home sales are projected at 3.9 million, close to the 2026 level but 26% below 2019, before the pandemic. Walker said the persistent housing shortage should limit the market’s downside, but affordability pressures are likely to become the dominant factor, continuing to weigh on transactions and new construction.
Inflation Limits the Fed’s Room to Cut Rates
If weakness in housing were the only concern, the Federal Reserve could reduce borrowing costs through rate cuts and support demand. Recent consumer and producer price data, however, have not provided clear evidence that inflation is easing. Data from the U.S. Bureau of Labor Statistics showed wholesale prices for final-demand goods rose 2.6%, among the fastest increases for the series since December 2009.
Fed officials are also monitoring inflationary effects from artificial-intelligence investment. Strong AI spending has pushed up costs for chips and electronic products, while policymakers also believe the economic gains from AI-related investment could partly offset weakness in sectors such as housing.
Markets currently expect the Fed to leave its benchmark rate unchanged at next week’s meeting. The Chicago Mercantile Exchange’s FedWatch tool, however, shows that interest-rate futures have priced in a relatively strong expectation of a 25-basis-point hike in December, with another increase still possible in March 2027. If that path materializes, mortgage costs could remain above levels that many buyers and developers can absorb.
Yun said mortgage rates had already risen by significantly more than the Fed’s short-term policy rate, suggesting they may be close to a near-term peak. Buyers and sellers may be waiting for financing conditions to improve before returning to the market. The next phase for housing will depend on whether mortgage rates can decline and whether inflation data give the Fed room to stop tightening policy.