The National Association of Realtors reported that its pending home sales index, which tracks homes under contract but not yet closed, slid 7.3% in September from August, hitting an all-time low in records dating back to 2001. The reading was 11.3% lower than a year ago, far worse than the 0.4% decline economists had forecast.
At the same time, privately owned housing starts fell at a seasonally adjusted annualized rate of 5.2% in September, against expectations of a 0.4% decline, according to Commerce Department data. Building permits slipped 0.2%, missing the consensus forecast for a 2% gain. Single-family permits fell to 845,000, the lowest since 2023, down 4% from August.
“Market conditions weakened in September due to fast-rising mortgage rates,” said Lawrence Yun, the NAR's chief economist. “Although job growth and income gains can support home purchases, housing affordability is more affected by changes in mortgage rates.”
The rate for a 30-year mortgage stood above 7% for most of September, ending the month around 7.6%, according to Mortgage News Daily. That is more than double the rate seen five years ago when the Covid-era housing boom was in full swing.
“The housing market is about to go into a deep sleep unless Washington can do a 180 on its policies and make the cost of a new home more affordable,” wrote Chris Rupkey, chief economist at Fwdbonds. “It is not winter yet but housing is going into a deep freeze.”
The downturn is compounded by a “lock-in” effect, in which homeowners with low mortgage rates are reluctant to sell and take on higher borrowing costs. Goldman Sachs economist Ronnie Walker said in a client note that more than 95% of mortgage borrowers have rates below the prevailing level, and 65% are at least 2 percentage points below it.
“Housing activity has remained rangebound in recent years, capped on the upside by affordability headwinds and buffered on the downside by the longstanding housing shortage,” Walker wrote. “In 2027, we expect the headwind from affordability to increasingly dominate, weighing further on activity.”
Goldman forecasts residential investment to decline 2.5%, 4% and 1% over the next three quarters, with a risk of steeper decline if mortgage rates do not fall. The firm sees single-family starts of 875,000 in 2027, little changed from this year, and existing home sales of 3.9 million, still 26% below pre-Covid 2019 levels.
Markets expect the Federal Reserve to hold benchmark rates steady at its meeting next week. However, futures pricing indicates a strong chance of a quarter-point hike in December and another in March 2027, according to the CME Group’s FedWatch tool.
Yun offered a note of optimism, suggesting that mortgage rates may have peaked. “Given that mortgage rates have already risen much more than the Federal Reserve's short-term interest rate hikes, mortgage rates could be topping out,” he said. “Buyers and sellers may simply be holding back until mortgage rates move favorably.”