The US residential property market is reeling from the weight of elevated interest rates, with both sales and construction activity cooling in tandem, and Wall Street may be underestimating how long this downturn will last.
According to National Association of Realtors (NAR) data, pending home sales contracts fell 7.3% month-over-month in September, far exceeding the 0.5% decline economists had expected, with the index dropping to 66.0, the lowest level since records for the series began, and down 11.3% year-over-year. Meanwhile, new home construction starts fell 5.2%, single-family building permits dropped to their lowest level since 2023, and mortgage purchase applications continued to weaken throughout October.
Financing costs are a major driver of the pressure on the housing market. The 10-year Treasury yield has risen roughly 120 basis points year-to-date, touching 5.34% at one point, while the 30-year mortgage rate has climbed to around 7.40%. Even as mortgage rates have pulled back somewhat recently, homebuying demand remains soft.
What is more concerning is that it is not just the Federal Reserve's policy rate pushing up mortgage costs; fiscal deficits and bond market pricing are also exerting upward pressure on long-end rates. This means that even if the Fed pivots to rate cuts in the future, mortgage costs may not decline in lockstep, and the US housing downturn could persist longer than the market expects.
Sales and Construction Weaken Together as the Chill Spreads Across US Housing
The sharp drop in September pending home sales contracts was not an isolated phenomenon in a few local markets. Pending sales fell 9.2% month-over-month in the West, 8.2% in the South, 6.5% in the Midwest, and 4.2% in the Northeast, with all four major regions posting declines.
Pending contracts typically lead final closings by one to two months, so the September decline signals that existing home sales will remain under pressure in the coming months. The simultaneous weakening of new construction starts and building permits indicates that the softness is not limited to the demand side but is beginning to affect residential construction activity as well.
High rates have also deepened the standoff between buyers and sellers. Potential buyers face higher monthly payments, further worsening housing affordability; homeowners who locked in low-rate mortgages are reluctant to sell, lest they take on higher financing costs after moving. Declining buyer willingness to enter the market and insufficient seller motivation to list properties together suppress transaction volumes.
Long-End Rates Tethered to Fiscal Pressure Mean Rate Cuts May Not Lower Mortgage Costs
The Fed raised the federal funds rate target range by 25 basis points to 3.75%–4.00% in September, further tightening monetary policy. At the same time, long-term Treasury yields and mortgage rate movements are also influenced by inflation expectations, Treasury supply, and term premiums, and cannot be simply inferred from the Fed's policy actions.
Rising term premiums are one of the potential pressures facing long-end rates. When investors worry about widening fiscal deficits, increased long-term Treasury supply, or rising inflation risk, they tend to demand higher yields to compensate for the risk of holding long-duration bonds. This means that even if the Fed pivots to rate cuts in the future, long-term Treasury yields may not decline in tandem, and mortgage rates could therefore remain elevated.
Market performance in 2024 offers a reference point. In September of that year, the Fed began its rate-cutting cycle with an initial 50 basis point reduction, followed by further cuts in November and December. But the cuts did not bring about a sustained decline in long-term financing costs: the 10-year Treasury yield actually rose notably in the following months, and the 30-year mortgage rate pushed back above 7%. This experience shows that there is no inevitable link between lower policy rates and lower long-term borrowing costs.
For the current US housing market, the key question is not when the Fed will start cutting rates, but whether long-term yields can come down. If inflation pressures and fiscal financing needs continue to push long-end rates higher, then even if monetary policy turns accommodative in the future, homebuyers may not see meaningful relief in financing costs, and a housing recovery will remain constrained.
Not a Repeat of 2008, But the Housing Freeze Could Last Longer
The current weakness in the US housing market does not necessarily mean a repeat of the 2008 financial crisis. Unlike back then, many existing homeowners have already locked in lower mortgage rates, keeping monthly payment pressure relatively manageable; at the same time, higher home equity and a low share of foreclosures and distressed sales reduce the risk of large-scale forced selling. NAR data shows that foreclosures and short sales combined accounted for only 2% of existing home sales in September.
But the absence of mass selling does not mean the market can recover quickly. Homeowners holding mortgages at around 3% are unwilling to sell, while potential buyers struggle to bear mortgage rates of around 7.4%, leaving both sides with insufficient incentive to transact. The result may be persistently low transaction volumes rather than an immediate sharp drop in home prices.
For investors, the deeper risk lies in the impact of long-term financing costs on the broader economy. If fiscal financing pressures continue to push long-end yields higher, corporate borrowing costs, equity valuations, and other assets that rely on long-term discount rates could also come under strain. The problems exposed by the US housing market are not just worsening housing affordability, but also the limits of the Fed's influence over long-term financing costs.
When high mortgage rates and low transaction liquidity reinforce each other, even without a systemic crisis erupting in the financial system, the residential market could experience a prolonged adjustment period. For Wall Street, the concern worth heeding is not whether housing will crash immediately, but that the drag from high financing costs on housing demand, construction activity, and the broader economy may prove more enduring than the market expects.
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