Housing is flashing warning signs just as the Fed weighs more interest rate hikes

Several major housing indicators weakened in September. Pending home sales, which track homes under contract, reached their lowest level in records dating to 2001. Housing starts and building permits also declined. Together, the measures show weakness in both current demand and future construction.

Pending sales dropped 7.3% from August and 11.3% from a year earlier. Economists had expected only a 0.4% monthly decline. Housing starts fell 5.2%, compared with a forecasted 0.4% drop. Building permits decreased 0.2%, despite expectations for a 2% increase.

Single-family permits were especially weak. They totaled 845,000, down 4% from August and the lowest level since 2023. The article links the deterioration to rapidly rising mortgage rates, which reduce affordability and discourage both buyers and builders. The weakness may continue if borrowing costs stay elevated.

A mortgage rate is the annual interest percentage charged on money borrowed to buy a home. Buyers usually repay the loan over many years, so even a small rate change can substantially alter the monthly payment and total interest cost. That directly affects affordability.

For example, a buyer borrowing the same amount at 7% pays more each month than at 3%. The higher payment can force the buyer to choose a cheaper home, provide a larger down payment, or delay the purchase. Higher rates also make it harder for builders and developers to finance projects.

The article reports a 30-year mortgage rate of 7.43%, after rates stayed above 7% for most of September. Five years ago, rates were closer to 3%. Lawrence Yun said income and job growth can help, but mortgage-rate changes have a stronger effect on affordability.

The borrowing-cost change is unusually large for a major household purchase. Mortgage rates were near 3% five years ago, but the article reports 7.43% now, with the rate ending September around 7.6%. That is an increase of roughly 4.4 percentage points, or nearly two and a half times the earlier rate.

Housing indicators have weakened alongside that increase. Pending home sales fell 7.3% in September and were down 11.3% from a year earlier. Housing starts decreased 5.2% during the month. Building permits slipped 0.2%, while single-family permits dropped 4% to 845,000.

The figures show how higher financing costs affect several parts of the market. Buyers face larger payments, owners avoid moving, and builders confront weaker demand. The article also reports that existing sales are forecast at 3.9 million, 26% below 2019 levels.

High mortgage rates weaken housing through several connected channels. They raise monthly payments for buyers, reduce the number of homes people can afford, and discourage current owners from selling. Weaker demand then gives builders less reason to start new projects. Financing those projects also becomes more expensive.

The article offers several examples. Pending sales reached a record low, while single-family permits fell 4% to 845,000. Goldman Sachs forecasts residential investment declining 2.5%, 4%, and 1% over the coming three quarters. It also expects existing home sales of 3.9 million, about 26% below 2019 levels.

The effects could last because most borrowers have much cheaper existing loans. More than 95% have rates below the prevailing level, and 65% are at least two percentage points lower. That lock-in effect reduces turnover. Goldman expects affordability pressures to weigh further on activity in 2027.

The Federal Reserve has two conflicting pressures. Housing is weakening, and lower interest rates could support buyers, builders, and broader demand. But the central bank is also trying to bring inflation under control. Easing too soon could make that inflation fight harder if price pressures remain strong.

Recent data offered little reassurance. Wholesale final-demand goods prices rose 2.6%, the fastest increase in a Bureau of Labor Statistics series dating to December 2009. The article also says consumer and producer price readings showed few signs of optimism. Fed officials are tracking higher costs for chips and electronics linked to strong artificial-intelligence investment.

As a result, housing weakness may not be enough to trigger easier policy. Officials believe AI investment could offset weakness in sectors such as housing. If short-term rates rise as expected, mortgage rates could climb further, worsening affordability before the housing market stabilizes.

The mortgage lock-in effect occurs when homeowners stay put because their current mortgage rate is far below the rate available on a new loan. Selling would mean giving up the cheap financing and borrowing again at a much higher cost. This makes moving financially unattractive, even when a household might otherwise want a different home.

The article highlights the size of the gap. More than 95% of mortgage borrowers have rates below the prevailing level, and 65% have rates at least two percentage points lower. A homeowner with a roughly 3% loan therefore faces a major payment increase when replacing it with a mortgage near 7.43%.

That reduces existing-home turnover. Fewer owners list homes, so buyers have fewer opportunities to move. Goldman says the effect is also weighing on activity and expects existing home sales to remain far below pre-Covid levels. The shortage buffers prices and construction from an even sharper decline.

The Federal Reserve sets a benchmark short-term interest rate, which influences borrowing costs across the economy. Mortgage rates are not set directly by that benchmark, but they respond to broader interest-rate conditions. When rates rise, home loans usually become more expensive. When rates fall, borrowing generally becomes cheaper and housing demand can improve.

The mechanism spreads beyond housing. Higher rates can reduce purchases, construction, and business investment, slowing economic activity and potentially reducing hiring. Lower rates can encourage spending and investment, supporting activity and employment. These effects take time and can differ across sectors. The article specifically notes that lower rates generally spur housing demand by lowering borrowing costs.

The Fed faces a trade-off. Housing indicators are deteriorating, but inflation remains a concern. Wholesale final-demand goods prices rose 2.6%, while AI investment is raising costs for chips and electronics. Officials therefore may keep rates high despite housing weakness, allowing affordability pressures to persist.