At 7.3%, the housing market stalls

The average rate on a 30-year fixed mortgage in America fell last week, to 7.32 per cent from 7.40 per cent, according to Freddie Mac's weekly survey published on October 22. It was the first weekly fall since late August. A year ago the same loan cost 6.19 per cent. In September, before the latest rise, it averaged 6.86 per cent.

A drop of eight basis points will not change many decisions. The damage done by the rise that came before it is now visible in almost every housing number published this month, and it is worth tracing, because housing is usually where higher interest rates bite first.

What a point and a bit costs

Take the median existing home, which sold for $417,500 in September, according to the National Association of Realtors, up 1.3 per cent on a year earlier. A buyer putting down 20 per cent and borrowing the rest over 30 years at last week's 7.32 per cent would pay about $2,294 a month in principal and interest. A year ago, on the median price then of $412,300 and a rate of 6.19 per cent, the same calculation gives about $2,018. That is $276 a month more, an increase of roughly 14 per cent, for a house whose price has barely risen. Almost all of the extra cost is interest.

Lenders limit what a household can borrow by what it can repay each month. A 14 per cent rise in the monthly payment therefore shuts out buyers on the margin even if prices do not move. It is happening while inflation-adjusted pay is falling: the Bureau of Labor Statistics reports real average hourly earnings 0.7 per cent lower in September than a year earlier.

Contracts at a record low

The clearest sign came on October 20. The NAR's index of pending home sales, which counts contracts signed but not yet closed, fell 7.3 per cent in September to 66.0, the lowest reading in the index's history. Forecasters had expected a fall of about half a per cent. Every region declined, led by the West, down 9.2 per cent, and the South, down 8.2 per cent. Contracts lead closings by a month or two, so the drop will show up in completed sales this autumn.

Completed sales are already weak. Existing-home sales ran at an annual rate of 3.99 million in September, up 1.5 per cent on August but down 2.2 per cent on a year earlier. Lawrence Yun, the NAR's chief economist, said August and September were "the two slowest months for home sales this year", and that "further increases in mortgage rates in recent weeks mean fewer buyers can qualify to purchase a home".

Builders pull back

New construction is slowing too. Housing starts fell 5.2 per cent in September to an annual rate of 1.221 million, according to the Census Bureau, below the roughly 1.305 million economists had expected and 7.4 per cent lower than a year earlier. Permits for new single-family homes, a guide to future building, fell 4 per cent. The bureau warns that monthly changes in starts carry wide margins of error, but the direction matches the sales data. Builders are reluctant to start homes they fear they will struggle to sell at today's financing costs.

That has a cost beyond the building trade. America has been short of homes for years. Fewer starts now mean fewer completions in 2027 and 2028, which will tend to keep prices and rents high after mortgage rates eventually come down.

Where prices go from here

So far prices have held. The NAR's median has risen year on year for 39 consecutive months. But the balance is shifting towards buyers. Inventory reached 1.60 million homes, the highest since November 2019, equal to 4.8 months of sales, up from 4.5 months a year ago. The typical home spent 33 days on the market, up from 31 in August. Mr Yun said sellers "need to be realistic about local market conditions", which in estate-agent language means cutting prices.

The regional picture shows where that is starting. The median price in the West fell 0.3 per cent over the year, to $613,600, while the South was almost flat. Both regions also had the steepest falls in pending sales. Prices in the Northeast, where fewer homes are for sale, still rose 4.7 per cent.

The link to the bond market

Mortgage rates follow the ten-year Treasury yield, which closed at 5.13 per cent on October 21, according to the Treasury, down from 5.31 per cent on October 5. Last week's dip in mortgage rates was that bond rally feeding through. The gap between the two, about 2.2 percentage points, reflects the extra return investors demand to hold mortgage debt, which homeowners can repay early when rates fall.

Whether the dip lasts depends on the Federal Reserve, which begins a two-day meeting today, and on oil. The Fed's own minutes show most officials expect another rate rise by the end of the year. For housing, the more important question is whether long-term yields keep falling as the economy slows. A record low in contract signings is the kind of evidence that makes that more likely, and it arrives with the next set of closings already lost.