Real Estate Shows Warning Signs as Fed Considers Further Interest Rate Hikes

The Federal Reserve’s fight against inflation faces a growing complication: The housing market is collapsing even as broader price pressures persist.

Real estate data deteriorated further in September, according to separate reports Tuesday, adding to an already complicated policy landscape for the central bank as it considers its next interest rate decision.

Things look set to get worse before they get better. If the Fed raises short-term rates as expected in the coming months, mortgage rates that are already at 7.43% could rise further, further dampening affordability. Rising property borrowing costs have coincided with a general rise in inflation and a housing shortage.

“The housing market is on the verge of falling into a deep slumber unless Washington can turn its policy around 180 degrees and make the cost of a new home more affordable,” wrote Chris Rupkey, chief economist at Fwdbonds. “It’s not winter yet but housing is freezing deep.”

The National Association of Realtors reported that pending sales, a forward-looking index that measures sales of homes under a deal but not finalized, hit an all-time low since 2001. The index slipped 7.3% for the month and was down 11.3% from a year ago. Wall Street’s estimate was for a decline of just 0.4%.

Housing starts, another important indicator for gauging the state of the market, also fell well beyond already moderate expectations on Tuesday.

Private housing starts fell at a seasonally adjusted annualized rate of 5.2% for the month, compared with an expected decline of just 0.4%, while building permits fell 0.2%, compared with a Dow Jones consensus forecast of a 2% gain, according to Commerce Department data.

Additionally, single-family permits totaled just 845,000, down 4% from August and the lowest number since 2023.

“Market conditions weakened in September due to rapidly rising mortgage rates,” said Lawrence Yun, NAR chief economist. “While job growth and rising incomes can support home purchasing, housing affordability is more affected by changes in mortgage rates.”

The rate on a 30-year mortgage was above 7% for most of September, ending the month around 7.6%, according to Mortgage News Daily. Five years ago, rates were closer to 3%, fueling the Covid-era housing boom that saw an explosion in demand and, consequently, prices.

Aside from upcoming sales figures, homebuilder confidence is at a 14-year low.

Under certain conditions, Fed officials could respond to weakness in the housing sector by easing monetary policy. Lower rates generally help boost demand by reducing borrowing costs.

But the Fed has a bigger fight on its hands in its efforts to bring inflation under control. Last week’s consumer and producer price figures provided few signs of optimism, as wholesale prices of final demand goods rose 2.6%, the fastest pace in a series of Bureau of Labor Statistics data dating back to December 2009.

Fed officials have said they are monitoring the inflationary effects of massive investments in artificial intelligence, which are driving up the cost of chips and electronics. At the same time, they believe that the benefits of AI investments could offset weaker sectors of the economy, such as housing.

However, conditions generally point to a housing market likely to weaken further before stabilizing, Goldman Sachs economist Ronnie Walker said in a client note Monday.

“In 2027, we expect affordability headwinds – reignited by the recent rebound in mortgage rates – to increasingly dominate, further weighing on activity,” Walker wrote. “Sustained rising mortgage rates will continue to have the most pronounced impact on housing turnover, and the recent rise in rates is likely to depress existing home sales in the months to come.”

Several data points tell the story: More than 95% of mortgage borrowers have rates below the going level, and 65% are 2 percentage points lower. Goldman forecasts residential investment declines of 2.5%, 4% and 1%, respectively, over the next three quarters, with the possibility of a steeper decline if mortgage rates do not fall.

The company forecasts just 875,000 single-family home starts in 2027, little change from this year, while existing sales are forecast at 3.9 million, also about the same as 2026 but notably 26% below pre-Covid 2019 levels. Walker attributed these average levels to the product of the “lock-in” effect in which it is too costly for current homeowners to move and incur higher borrowing costs as deteriorating affordability weighs on new construction.

“Real estate activity has remained constrained in recent years, limited upwards by affordability concerns and cushioned downwards by the long-standing housing shortage,” Walker wrote. “In 2027, we expect affordability barriers to increasingly dominate, further weighing on activity.”

Markets expect the Fed to keep its benchmark rates steady when it meets next week. However, futures prices imply a high probability of a quarter-point hike in December and another in March 2027, according to the CME Group’s FedWatch tool.

One point of optimism comes from Yun, the NAR economist, who thinks the trend in mortgage costs ahead of the Fed hikes could mean rates are plateauing.

“Given that mortgage rates have already risen much more than the Federal Reserve’s short-term interest rate hikes, mortgage rates could peak,” he said. “Buyers and sellers may simply hold off until mortgage rates move favorably.”