The housing market took its worst hit in decades last month as mortgage rates near 7.4 percent froze buyers out and sent builders into retreat, according to reports released Tuesday.
The National Association of Realtors said its pending home sales index collapsed 7.3 percent in September — more than fourteen times worse than the 0.5 percent decline economists expected. The index fell to 66.0, the lowest reading since the measure began in 2001, and sales were down 11.3 percent from a year ago.
Every region of the country took a hit. Contract signings dropped 9.2 percent in the West, 8.2 percent in the South, 6.5 percent in the Midwest and 4.2 percent in the Northeast, with all four regions also falling compared to last September.
The pain wasn’t limited to buyers. The Commerce Department reported housing starts fell 5.2 percent in September to an annual rate of 1.221 million, well short of the roughly 1.3 million economists had forecast and 7.4 percent below year-ago levels. Single-family starts dropped 4.6 percent to 859,000, the weakest pace in a year, and August’s figures were revised down as well. Multifamily starts fell 6.7 percent, down nearly 25 percent from last year.
Permits for future construction told the same story. Single-family permits fell 4.0 percent to 845,000, their lowest level in roughly three and a half years.
The culprit is clear: the average rate on a 30-year fixed mortgage jumped from 6.66 percent in late August to 7.28 percent by early October, hit 7.40 percent on October 8, and has stayed there since — the highest level in nearly three years.
“Market conditions weakened in September due to fast-rising mortgage rates,” said Lawrence Yun, chief economist of the National Association of Realtors. “Although job growth and income gains can support home purchases, housing affordability is more affected by changes in mortgage rates.”
Builders Are Bailing Too
A separate report Monday showed homebuilder confidence sinking to its lowest point in more than 14 years. The NAHB/Wells Fargo Housing Market Index dropped three points to 29 in October, the weakest reading since June 2012. Anything under 50 means more builders see bad conditions than good.
Every part of that survey got worse. Current sales conditions fell to 33, six-month sales expectations dropped to 32, and buyer traffic plunged five points to 18 — the lowest since April 2012 outside the pandemic shock.
Builders are slashing prices to move inventory. The survey found 43 percent cut prices in October, the highest share recorded since the association started tracking it in 2020, with an average cut of 6 percent. Another 65 percent are offering incentives just to get buyers in the door.
“Housing remains squeezed by supply-side constraints and significant affordability challenges,” said Robert Dietz, chief economist of the National Association of Home Builders. “Demand persists, but higher mortgage rates, elevated construction costs and weaker consumer confidence are keeping more buyers on the sidelines.”
The math is grim either way: rates have crushed demand, but the matching pullback in new construction threatens to choke off supply for years to come, keeping pressure on affordability long after this slump ends.
Yun said he thinks mortgage rates may be close to peaking, though he cautioned that inflation and rising energy prices remain wild cards. For now, home prices themselves haven’t collapsed — Yun credits a lack of distressed properties for keeping prices propped up as both buyers and sellers wait out the rate environment.
