Pending home sales in the U.S. fell to a record low in September as mortgage rates climbed to their highest level in nearly three years, according to data released by the National Association of Realtors (NAR) on Oct. 20. The Pending Home Sales Index dropped 7.3% from August and 11.3% from last year, reaching 66.0—a level roughly one-third below the 2001 benchmark of 100. Pending home sales, which track signed contracts before closings, serve as a leading indicator for completed transactions.
Mortgage rates rose sharply in September, with the average rate on a 30-year fixed mortgage increasing from 6.71% on Sept. 3 to 7.40% by Oct. 15, according to Freddie Mac. The surge in borrowing costs coincided with declines in home construction. Housing starts fell 5.2% in September to a seasonally adjusted annual rate of 1.221 million homes, while single-family housing starts dropped 4.56% to 859,000 annualized—the lowest level since September 2022. Building permits, an indicator of future construction, also declined by 4%.
The decline in pending sales was widespread across all regions. The West saw the largest monthly drop at 9.2%, followed by the South at 8.2%, the Midwest at 6.5%, and the Northeast at 4.2%. All regions also recorded year-over-year declines, with the West posting the steepest annual decrease at 15%.
NAR Chief Economist Lawrence Yun attributed the market downturn to fast-rising mortgage rates, noting that while job growth and income gains could support home purchases, housing affordability is more directly impacted by borrowing costs. Yun suggested that mortgage rates may be approaching a peak, given their rapid rise compared to the Federal Reserve’s increases in short-term interest rates. However, he cautioned that higher energy prices and inflation pressures remain a risk factor.
Economists warn that the housing market’s weakness could persist into 2024, with Ben Ayers, senior economist at Nationwide Financial, predicting that home construction activity may remain subdued as builders adjust to higher rates. Many developers are already offering price cuts and incentives to attract buyers, which is reducing profit margins.
The Federal Reserve’s monetary policy has played a key role in shaping mortgage rates, as its decisions on short-term interest rates influence long-term borrowing costs. The central bank has raised rates multiple times in 2023 to combat inflation, though its impact on mortgage rates is indirect. Analysts note that while the Fed’s actions aim to cool the broader economy, the housing sector—highly sensitive to rate changes—has borne the brunt of the adjustment.
Homebuilders have also expressed concern. Builder confidence dropped to its lowest level in over 14 years, according to industry reports, reflecting growing pessimism about near-term market conditions. The National Association of Home Builders (NAHB) Housing Market Index fell for the 11th consecutive month in October, signaling continued caution among developers.
The U.S. Census Bureau and Freddie Mac data further underscore the market’s challenges. Housing starts in September were 7.4% below the previous year’s level, while mortgage rates have remained elevated, averaging 7.40% as of Oct. 15—the highest since 2020. The combination of higher rates and reduced affordability has led to a sharp pullback in buyer activity, with some potential homeowners delaying purchases in anticipation of more favorable conditions.
Regional disparities highlight the uneven impact of the downturn. The South and West, typically the most active markets, experienced the steepest declines, while the Northeast and Midwest saw more moderate but still significant drops. The West’s high home prices and the South’s high demand make these regions particularly vulnerable to rate hikes, as buyers face larger monthly payments.
Industry experts suggest that the market may stabilize once mortgage rates begin to decline, though forecasts remain uncertain. For now, the record-low pending sales and falling construction activity signal a prolonged period of adjustment for the housing sector.