Housing is flashing warning signs just as the Fed weighs more interest rate hikes

The Federal Reserve's inflation fight is running into a growing complication: The housing market is slumping even as broader price pressures persist.

Housing data deteriorated further in September, according to separate reports Tuesday, adding to an already complicated policy landscape for the central bank as it contemplates its next move on interest rates.

Things appear poised to get worse before they get better. If the Fed raises short-term rates as expected over the next several months, mortgage rates that are already at 7.43% could push even higher, putting a further damper on affordability. Higher home borrowing costs have coincided with a general rise in inflation and a housing shortage.

"The housing market is about to go into a deep sleep unless Washington can do a 180 on its policies and make the cost of a new home more affordable," wrote Chris Rupkey, chief economist at Fwdbonds. "It is not winter yet but housing is going into a deep freeze."

The National Association of Realtors reported that pending sales, a forward-looking index that measures home sales under agreement but not completed, hit an all-time low in records that stretch back to 2001. The index slid 7.3% for the month and was off 11.3% from a year ago. The Wall Street estimate was for a decline of just 0.4%.

Housing starts, another important metric when evaluating the state of the market, also posted a decline well outside already-muted expectations Tuesday.

Privately owned housing starts fell at a seasonally adjusted annualized rate of 5.2% on the month, against expectations for a decline of just 0.4%, while building permits were off 0.2%, against the Dow Jones consensus outlook for a 2% gain, according to Commerce Department data.

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

"Market conditions weakened in September due to fast-rising mortgage rates," said Lawrence Yun, the NAR's chief economist. "Although job growth and income gains can support home purchases, housing affordability is more affected by changes in mortgage rates."

The rate for 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%, feeding into the Covid-era housing boom that saw an explosion in demand and, consequently, prices.

Outside of the pending sales number, home builder sentiment is at lows not seen in 14 years.

Under some conditions, Fed officials might respond to the housing weakness with easier monetary policy. Lower rates generally help spur demand by lowering borrowing costs.