US housing market slumps as mortgage rates climb and inflation persists

The US housing market is slumping even as broader price pressures persist, creating new challenges for the Federal Reserve. Separate reports released on Tuesday showed that housing data deteriorated further in September.

Market Data

Pending home sales dropped significantly in September, hitting an all-time low in records going back to 2001. The National Association of Realtors reported that the index slid 7.3% for the month and dropped 11.3% from a year ago, missing the Wall Street estimate for a 0.4% decline. Housing starts also fell at a seasonally adjusted annualized rate of 5.2% on the month, while building permits were off 0.2%. Single-family permits totaled 845,000, down 4% from August to the lowest level since 2023. Home builder sentiment sits at lows not seen in 14 years.

Fed Policy And Rates

The downturn comes as mortgage rates remain elevated. The 30-year mortgage rate stayed above 7% for most of September and ended the month around 7.6%, compared to closer to 3% five years ago. Economists and analysts point to these fast-rising mortgage rates and a housing shortage as key drivers of the slump. While lower rates would typically help spur demand, the central bank is currently focused on a larger fight against inflation. Recent readings showed wholesale final demand goods prices rising 2.6%, the fastest pace in a Bureau of Labor Statistics series dating back to December 2009. Markets expect the central bank to hold benchmark rates steady at its upcoming meeting, though futures pricing implies a strong chance of future hikes.

Context

The Federal Reserve uses interest rates to control inflation in the broader economy, but raising rates also increases borrowing costs for home buyers. The current housing shortage combined with high mortgage rates has created a difficult environment for buyers and builders alike. Many existing homeowners are choosing not to move because their current mortgage rates are much lower than prevailing market rates.