The Federal Reserve faces a challenging policy landscape as the housing market shows signs of weakening, even as broader inflation pressures persist. September's housing data revealed further deterioration, with pending home sales hitting an all-time low since 2001, down 7.3% for the month and 11.3% year-over-year. Housing starts also declined sharply, falling 5.2% against expectations of a modest 0.4% drop, while building permits decreased 0.2%, missing forecasts for a 2% gain.
Mortgage rates, currently at 7.43%, are expected to rise further if the Fed proceeds with anticipated interest rate hikes. This would exacerbate affordability issues, as rates have already surged from around 3% five years ago. Chris Rupkey, chief economist at Fwdbonds, warned that without policy changes to lower home costs, the housing market could enter a 'deep freeze.' Lawrence Yun, chief economist at the National Association of Realtors, noted that while job growth supports home purchases, mortgage rates significantly impact affordability.
Goldman Sachs economist Ronnie Walker anticipates further weakening in the housing market, with residential investment forecasted to decline over the next three quarters. Single-family starts are expected to remain low, and existing home sales are projected to stay below pre-Covid levels. The 'lock-in' effect, where homeowners avoid moving due to higher borrowing costs, is contributing to stagnation. Despite these challenges, Yun remains optimistic that mortgage rates may have peaked, potentially encouraging buyers and sellers to re-enter the market.
The Fed is expected to hold benchmark rates steady at its next meeting but may consider hikes in December and March 2027. While housing weakness could prompt easier monetary policy, the central bank's primary focus remains on controlling inflation, which showed few signs of easing in recent reports.