American Housing Market Declines in September

The housing market in the U.S. took a significant hit in September, primarily due to rising mortgage rates that led to an all-time low in pending home sales and a sharp decline in construction activity, as reported on Tuesday.

The National Association of Realtors announced a drastic 7.3 percent drop in its pending home sales index for September, which was a far greater fall than the anticipated 0.5 percent decrease. The index has now plummeted to 66.0, the lowest level since tracking began in 2001. When compared to the previous year, pending sales have diminished by 11.3 percent.

In a separate report, the Commerce Department indicated that housing starts decreased by 5.2 percent in September, with the seasonally adjusted annual rate settling at 1.221 million homes. This figure falls short of economists’ expectations, which hovered around 1.3 million, and represents a 7.4 percent drop from a year ago.

These disappointing figures follow a report from Monday, revealing that confidence among American home builders has plummeted to its lowest point in over 14 years, illustrating the heavy impact of the recent rise in mortgage rates on the residential real estate sector.

The average rate for a 30-year fixed mortgage surged from 6.66 percent at the end of August to 7.28 percent by early October, hitting 7.40 percent on October 8. This rate is the highest recorded in nearly three years.

“The market faced significant weakness in September due to rapidly increasing mortgage rates,” stated Lawrence Yun, chief economist of the National Association of Realtors. He added that while job growth and income increases can help home purchases, affordability is more deeply affected by shifts in mortgage rates.

The fall in pending sales was broad-based. The West saw a decrease of 9.2 percent, the South 8.2 percent, the Midwest 6.5 percent, and the Northeast recorded a 4.2 percent decline. Each region also experienced year-over-year drops.

Pending home sales are a measure of signed contracts for existing homes prior to finalization, typically leading actual sales by one or two months. This suggests that the September weakness could foretell further declines in sales closings later this fall.

Construction activity is also reflecting this downturn. In September, single-family housing starts fell 4.6 percent to an annualized rate of 859,000, marking the lowest rate in a year. Previous figures from August were revised downwards, from 918,000 to 900,000, revealing that the rebound in construction was weaker than initially thought.

Multifamily housing starts, such as apartments and condominiums, decreased by 6.7 percent to an annualized rate of 362,000, which is down nearly 25 percent compared to the previous year.

Building permits, which indicate future construction activity, didn’t offer much optimism either. Total permits edged down by 0.2 percent, reaching an annualized rate of 1.400 million. However, this modest decline masked a more pronounced drop in the single-family market.

Permits for single-family homes fell 4.0 percent to 845,000— the lowest number seen in about three and a half years. Conversely, permits for larger buildings, those with five or more units, rose to 503,000.

The dim outlook for construction was reinforced by the National Association of Home Builders/Wells Fargo Housing Market Index, which indicated builder confidence dropped three points to 29 in October, the lowest since June 2012. Scores below 50 suggest that more builders perceive market conditions as poor rather than favorable.

All components of the survey saw declines. The index measuring current sales conditions fell to 33, while expectations for sales in the next six months decreased to 32. The traffic of potential buyers plummeted five points to 18, the lowest since April 2012, not counting the initial pandemic disruptions.

To attract buyers, builders have increasingly turned to price reductions. The survey revealed that 43 percent of builders implemented price cuts in October, the highest percentage since tracking began in 2020. The average reduction was about 6 percent, and 65 percent of builders reported offering sales incentives.

At the same time, higher mortgage rates have coincided with rising expenses for builders, including increased costs for construction financing, materials, energy, and labor.

“Housing is still constrained by supply issues and significant affordability challenges,” noted Robert Dietz, chief economist of the home builders association. “While demand persists, elevated mortgage rates, high construction costs, and diminished consumer confidence have kept more buyers on the sidelines.”

This downturn poses a significant challenge for housing affordability. Increased borrowing costs have weakened demand and slowed sales, but a reduction in home construction could tighten the supply of new homes in the future.

Yun indicated that the recent rise in mortgage rates might be nearing its peak, though he cautioned that accelerating energy prices and inflation remain uncertain factors.

Despite the drop in transactions, widespread declines in home prices have not yet been observed. Yun pointed out that the limited availability of distressed properties is helping maintain prices, as both buyers and sellers seem to be waiting for more favorable mortgage rates.