U.S. existing home sales are likely to fall sharply in the fourth quarter as rising mortgage rates worsen affordability and discourage buyers, even as the structure of the mortgage market and low layoffs limit the risk of a steep price drop, according to Pantheon Macroeconomics.
Existing home sales rose to 3.99M in September, from 3.93M in August, despite a surge in long-term Treasury yields and mortgage rates. However, the September figures came too early to reflect the latest increase in borrowing costs, Pantheon economists Samuel Tombs and Oliver Allen said in their Oct. 14 report.
The average rate on a 30-year conventional mortgage climbed to around 7.5% in early October, from about 6.8% in late August, an increase of roughly 70 basis points. If the rise is sustained, existing home sales are likely to fall to a new post-Covid low in December, the economists said.
Higher borrowing costs are also expected to put further pressure on housing affordability. Pantheon estimated that the typical monthly payment on a new mortgage for a median existing single-family home, assuming an 80% loan-to-value ratio, would rise to nearly 40% of average after-tax income in October, up from close to 35% on the eve of the Iran war.
Despite the deterioration in affordability, a sharp correction in home prices is not inevitable, according to Pantheon.
Long-term fixed-rate mortgages continue to insulate most existing homeowners, making a wave of distressed selling unlikely. Roughly two-thirds of mortgage borrowers had interest rates below 5% in the second quarter of 2026, while adjustable-rate mortgages accounted for around 8% of outstanding mortgage value, up from 6% three years earlier.
Low layoffs are also helping limit forced home sales, the economists said. At the same time, higher mortgage rates make moving and taking out a new loan increasingly unfeasible for most existing homeowners, keeping the supply of homes constrained.
Pantheon said the housing market probably will adjust chiefly through lower transaction volumes, echoing the downturn in 2022 and 2023, rather than through a substantial decline in prices. Weaker sales would weigh on residential investment, but a major decline in home prices and the resulting drag on consumer spending should be avoided, provided mortgage rates do not rise materially further, the economists said.
The outlook for new residential construction is less favorable. Unlike in 2022 and 2023, homebuilders now face substantial excess inventory, which Pantheon expects to weigh on construction activity.
However, with real residential investment already around 20% below its mid-2021 peak and accounting for just 3% of GDP, a further decline would likely reduce GDP growth in 2027 by only 0.1 percentage point, the economists estimated.
Pantheon said the expected slowdown in existing home sales will be a headwind for the economy, but probably a broadly manageable one.
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