The US housing market is deteriorating sharply even as the Federal Reserve considers raising interest rates further, creating a policy dilemma for the central bank. The National Association of Realtors reported that pending sales, a measure of homes under agreement but not yet closed, reached an all-time low in September according to records stretching back to 2001. The index fell 7.3% for the month and was down 11.3% compared with a year earlier, far exceeding Wall Street expectations for a decline of just 0.4%.
Housing starts also disappointed forecasters. The Commerce Department said privately owned housing starts fell at a seasonally adjusted annualized rate of 5.2% in September, against expectations for a decline of just 0.4%. Building permits fell 0.2% when analysts expected a 2% gain. Single-family permits totalled just 845,000, down 4% from August and the lowest figure since 2023. The National Association of Realtors' chief economist attributed the weakness to rapid increases in mortgage rates. A 30-year mortgage rate was above 7% for most of September, ending the month around 7.6%, compared with rates closer to 3% five years ago, according to Mortgage News Daily. Home builder sentiment has fallen to levels not seen in 14 years.
The Fed faces conflicting pressures. Normally, central banks respond to housing weakness by cutting rates to boost demand through lower borrowing costs. However, the inflation fight remains urgent. The Bureau of Labor Statistics showed that wholesale final demand goods prices rose 2.6% in recent readings, the fastest pace in data going back to December 2009. Federal Reserve officials have cited inflationary pressures from investment in artificial intelligence, which is raising chip and electronics costs.
Goldman Sachs expects further deterioration ahead. The firm's economist Ronnie Walker forecast that affordability headwinds will increasingly dominate housing activity in 2027, pushing existing home sales lower over coming months. Goldman predicts single-family starts of 875,000 in 2027, while existing home sales are forecast at 3.9 million, about 26% below 2019 pre-pandemic levels. More than 95% of mortgage borrowers currently have rates below prevailing levels, with 65% holding rates at least 2 percentage points lower, reducing incentive to move.
Market expectations suggest the Fed will hold rates steady at its next meeting, but futures pricing from the CME Group's FedWatch tool implies a strong possibility of quarter-point hikes in December and March 2027. One source of potential relief came from the National Association of Realtors' chief economist, who suggested that mortgage rates may be topping out since they have already risen more than the Fed's short-term rate increases, potentially encouraging buyers and sellers to return to the market.
For American borrowers and homebuyers, the housing market slowdown means tighter affordability conditions that could persist through 2027, while savers and investors face uncertainty about how long the Fed will continue tightening policy despite housing weakness.