Home purchase cancellations likely as rates hit 20-month high 

While most real estate economic data is heading in the wrong direction, this week did deliver a bit of a surprise for new home sales.

By offering incentives and cutting prices, home builders were able to close more deals in August, U.S. Census Bureau data indicates. The seasonally adjusted annual rate of new home sales was 684,000 last month, up 6.4% compared to July but still down 2% compared to a year ago, the agency reported on Sept. 24.

But there's a caveat: These new home sales closed earlier this summer, when mortgage rates were significantly lower. The month-over-month rise thus "masked continued weakness in the broader new-home market," wrote Danushka Nanayakkara-Skillington, assistant vice president for forecasting and analysis at the National Association of Home Builders (NAHB).

"Despite the monthly increase, housing affordability remains a significant challenge for prospective buyers," Nanayakkara-Skillington said in a Sept. 24 blog post.

Builders trying to sell homes 'that better fit today's budgets'

Home builders are achieving some momentum in an otherwise sluggish housing market by lowering prices. The median price for new homes sold in August was $393,700, according to the Census Bureau, slightly above the July median price of $392,200 but down 5.8% year-over-year. In contrast, the median existing home sales price was $429,100 last month, up 1.6% year-over-year, according to the National Association of Realtors.

The annual drop in the new home median sales price reflects in part the discounts that builders are offering to incentivize buyers amid a persistently slow housing market. Product mix is also playing an important role as builders construct and sell smaller homes, according to Sam Williamson, senior economist at First American.

Builders are "reaching buyers with lower-priced homes that better fit today's budgets," Williamson explained.

Mortgage rates continue to surge

Given what's happening with mortgage rates, buyers need that help. The 30-year fixed-rate mortgage averaged 7.03% this week, according to Freddie Mac — the highest weekly average since January 2025 and more than a full percentage point higher than before the war in Iran began in late February.

As of the morning of Sept. 24, Mortgage News Daily pegged the daily rate at 7.37%. With 10-year treasury bonds surging in the past few days as oil prices hovered around $100 per barrel, the 30-year mortgage rate has shown no sign that its climb will slow. 

Plan for higher rates to stick, economist warns

Investors are becoming increasingly concerned about current economic conditions as the odds rise of another Federal Reserve rate hike following last week's quarter-point increase. On Sept. 24, the CME Group's FedWatch tool estimated that the chances of a short-term interest rate increase at the Fed's October meeting was 68.6%, up from 55.4% a week earlier.

Anthony Smith, senior economist at Realtor.com, has recommended that buyers build a 50-basis-point range on either side of the current mortgage rate into their budget amid this volatile period. For example, buyers should plan for a 30-year rate between 6.5% and 7.5%, a roughly $30,000 swing in purchasing power on a $2,000 monthly mortgage payment.

As for sellers, "the question is still whether to cut prices as a greater share have recently done or pull the listing," Smith said. "Either way, this will continue to add to the headwinds in place for home sales."

Mortgage applications slow, contract cancellations rise

Overall mortgage application activity was down 1.5% for the week ending Sept. 18 compared to one week prior, according to the Mortgage Bankers Association (MBA). 

The unadjusted purchase index was 11% lower than a year ago, while refinancing drooped to its slowest pace since February 2025, according to Mike Fratantoni, MBA's SVP and chief economist. Those who are submitting purchase applications are more often opting for adjustable rate mortgages, Fratantoni noted.

Meanwhile, the number of canceled home sale contracts reached a five-year high in August, with nearly 12% of June contracts failing to close by the 60-day mark, according to a Sept. 24 Cotality report.

"Rising mortgage rates have pushed buyers without rate locks beyond their affordability boundaries," the report said, adding that contract cancellations "likely accounted for at least a third of August's closed sales declines."

If this trend continues, it added, "rising rates may lead to elevated cancellations through autumn."