Pending sales, builder confidence plummet to lowest levels in years 

Homebuyers and homebuilders both scurried to the sidelines last month as the spike in mortgage rates took its toll on the housing market.

Big drops in signed contracts hit every region

Pending sales in September dropped 7.3% compared to August and fell 11.3% year-over-year, according to the National Association of Realtors' monthly report. That's the lowest level in the report's history, which dates back to 2001, and much worse than the consensus forecast of a 0.4% monthly drop.

No U.S. region was spared from the decline of signed contracts, but the West and South took the biggest year-over-year hits (down 15% and 12%, respectively). Pending sales in the Northeast dropped 9.4% year-over-year and slowed by 8.7% in the Midwest.

This freeze in buyer activity could linger until affordability improves, said Hannah Jones, senior economist at Realtor.com. For now, 30-year mortgage rates are expected to remain in the 7.5% range. Combined with persistently elevated home prices, high rates have priced out many more Americans over the past six months.

"Against that backdrop, buyers will likely keep facing tough affordability conditions through year-end, especially as wage growth runs below inflation and further erodes real buying power," Jones said.

Mortgage rates 'topping out'? 

But mortgage rates have been a bit calmer so far this week, with Mortgage News Daily estimating that the 30-year rate was at 7.4% the morning of Oct. 20. 

"Given that mortgage rates have already risen much more than the Federal Reserve's short-term interest rate hikes, mortgage rates could be topping out," suggested Lawrence Yun, NAR's chief economist. "However, increasing energy prices and the resulting inflationary pressure are highly uncertain."

Fewer builders embarking on new home projects

The homebuilding sector also slowed in September. Housing starts for single-family homes fell 4.6% compared to August but increased 2.6% year-over-year, according to the U.S. Census Bureau. Combined with multifamily construction, housing starts fell 5.2% from August and dropped 7.4% year-over-year.

The completion of single-family homes has also slowed, with the number completed in September dropping 2.4% compared to August and falling 11% year-over-year.

While buyer affordability concerns pose similar headwinds for homebuilding and for residential sales, rising material costs are also holding builders back, according to Bill Owens, chairman of the National Association of Home Builders (NAHB). "A sustained increase in home building is key to long-term affordability, but near-term construction depends on mortgage rates, financing conditions and efforts to ease regulatory barriers," Owens said.

The silver lining in the new home housing market? Buyers can negotiate rate buydowns that could knock their rate down by a full percentage point, according to Joel Berner, senior economist at Realtor.com. "Buyers hold the negotiating power in the new home market," Berner said, adding that some may find "exceptional deals."

Builder confidence tumbles to 14-year low

Builder confidence levels also reflect the housing market's prolonged slowdown. According to the NAHB's monthly index, which measures builder sentiment on a range of 0 to 100, confidence fell three points in October to 29 — the lowest level recorded in over 14 years.

Meanwhile, the federal government's crackdown on immigration is also impacting construction, noted Robert Dietz, chief economist at the NAHB. "Nationwide, more than one-third of builders reported immigration enforcement activity in their market areas during the past month, causing construction delays and discouraging legal workers from reporting to work," Dietz said.