Housing Slump Worsens Amid Higher Rates

The American housing market deteriorated sharply in September as rising mortgage rates drove pending home sales to a record low and sent home construction tumbling, according to reports released Tuesday. The National Association of Realtors said its index of pending home sales plunged 7.3 percent in September, far worse than the 0.5 percent decline economists had expected. The index fell to 66.0, its lowest level since the series began in 2001. Pending sales were down 11.3 percent from a year earlier. Separately, the Commerce Department reported that housing starts fell 5.2 percent in September to a seasonally adjusted annual rate of 1.221 million homes, well below economists’ expectations of approximately 1.3 million. Starts were 7.4 percent below their year-earlier level. The disappointing figures follow a report Monday showing that confidence among American home builders plunged to its lowest level in more than 14 years, adding to evidence that the recent surge in mortgage rates is taking a heavy toll on residential real estate. The average rate on a 30-year fixed mortgage climbed from 6.66 percent in late August to 7.28 percent at the beginning of October, according to Freddie Mac. It reached 7.40 percent on October 8 and remained there last week, 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.” The collapse in pending sales was widespread. Contract signings fell 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. All four regions also recorded declines compared with September of last year. Pending home sales measure signed contracts for existing homes before transactions are completed. They typically lead completed home sales by one or two months, suggesting that the weakness in September could translate into a further decline in sales closings later this fall. The construction figures showed a similar pullback in activity. Single-family housing starts fell 4.6 percent in September to an annualized rate of 859,000, the lowest level in a year. The August figure was revised downward to 900,000 from the previously reported 918,000, indicating that the rebound in single-family construction that month was weaker than initially estimated. Multifamily housing starts, including apartments and condominiums, fell 6.7 percent to an annualized rate of 362,000, down 24.9 percent from a year earlier. Building permits, a measure of future construction activity, offered little encouragement. Total permits edged down 0.2 percent to an annualized rate of 1.400 million, but that relatively modest decline concealed a sharper deterioration in the single-family market. Permits for single-family homes fell 4.0 percent to 845,000, their lowest level in approximately three and a half years. Permits for buildings with five or more units, meanwhile, rose to 503,000. The weakening construction outlook was reinforced by Monday’s National Association of Home Builders/Wells Fargo Housing Market Index. Builder confidence fell three points to 29 in October, the lowest reading since June 2012. Readings below 50 indicate that more builders regard market conditions as poor than good. All three components of the survey deteriorated. The index measuring current sales conditions dropped to 33, expectations for sales over the next six months fell to 32, and the measure of prospective buyer traffic plunged five points to 18, its lowest reading since April 2012, excluding the initial disruption of the pandemic. Builders have increasingly resorted to price reductions to attract customers. The survey found that 43 percent of builders cut home prices in October, the largest share since the association began collecting the measure in 2020. The average reduction was 6 percent, while 65 percent of builders reported offering sales incentives. Higher mortgage rates are also coinciding with rising costs for builders, including more expensive construction financing, materials, energy and labor. “Housing remains squeezed by supply-side constraints and significant affordability challenges,” said Robert Dietz, chief economist of the home builders association. “Demand persists, but higher mortgage rates, elevated construction costs and weaker consumer confidence are keeping more buyers on the sidelines.” The downturn presents a difficult challenge for housing affordability. Higher borrowing costs have weakened demand and slowed sales, but the accompanying pullback in home construction could restrict the supply of new homes in the years ahead. Yun suggested that the recent climb in mortgage rates might be nearing its end, although he warned that rising energy prices and inflation remain sources of uncertainty. Despite the collapse in transactions, widespread declines in home prices have yet to materialize. Yun said the limited number of distressed properties was helping to support prices, with buyers and sellers holding back in hopes that mortgage rates will eventually become more favorable.