Housing starts and pending sales hit record lows as Fed weighs hikes

The National Association of Realtors reported that pending home sales hit an all-time low in records dating back to 2001, sliding 7.3% in September and falling 11.3% from a year earlier. This sharp deterioration contrasts with a Wall Street estimate for a mere 0.4% decline, signaling a deepening slump in the housing market just as the Federal Reserve contemplates its next move on interest rates.

Commerce Department data revealed that privately owned housing starts fell at a seasonally adjusted annualized rate of 5.2% on the month, far exceeding expectations for a 0.4% drop. Building permits also missed forecasts, declining 0.2% against a Dow Jones consensus outlook for a 2% gain. Single-family permits totaled 845,000, down 4% from August and marking the lowest number since 2023.

Lawrence Yun, the NAR's chief economist, attributed the weakening market conditions to fast-rising mortgage rates. He noted that while job growth and income gains can support home purchases, affordability is more sensitive to changes in borrowing costs. The rate for a 30-year mortgage remained above 7% for most of September, ending the month around 7.6%, according to Mortgage News Daily. This stands in stark contrast to rates closer to 3% five years ago, which fueled the demand surge during the pandemic-era housing boom.

Chris Rupkey, chief economist at Fwdbonds, warned that the housing market is entering a "deep freeze" unless Washington reverses its policies to make new homes more affordable. He suggested that if the Fed raises short-term rates as expected over the next several months, mortgage rates already at 7.43% could push even higher, further dampening affordability.

Inflation data provides little relief for policymakers. Wholesale final demand goods prices rose 2.6%, the fastest pace in a Bureau of Labor Statistics series going back to December 2009. Fed officials are tracking the inflationary effects of robust investment in artificial intelligence, which is driving up the cost of chips and electronics. They believe these benefits could offset weaker sectors like housing, though conditions generally point to further weakness before stabilization.

Ronnie Walker, a Goldman Sachs economist, stated in a client note that affordability headwinds will increasingly dominate in 2027. The firm forecasts residential investment to decline by 2.5%, 4%, and 1% over the coming three quarters. Goldman sees single-family starts at just 875,000 in 2027, with existing sales forecast at 3.9 million, a figure notably 26% below pre-pandemic 2019 levels. Walker attributed these middling levels to the "lock-in" effect, where current homeowners find it too expensive to move and take on higher borrowing costs.

More than 95% of mortgage borrowers have rates below the prevailing level, with 65% sitting two percentage points lower. This dynamic buffers the downside of housing activity due to the longstanding housing shortage but caps upside potential. Markets expect the Fed to hold benchmark rates steady at its next meeting. However, CME Group FedWatch tool pricing suggests a significant likelihood of rate increases in both December and March 2027.

Yun offered a point of optimism, suggesting that mortgage rates could be topping out because they have already risen much more than the Federal Reserve's short-term interest rate hikes. He believes buyers and sellers may be holding back until mortgage rates move favorably.