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Is the housing market likely to get better or worse?

The fact is, housing is a cyclical industry that is very sensitive to interest rates. The Fed spent 2022 and 2023 jacking rates up from nearly zero to a multi-decade high, and even with a handful of cuts since, mortgage rates have been rising this year, as shown here, because the bond market keeps pricing in more inflation and more deficit spending than the Fed would like to admit.

Mortgage

The result is a housing recession that is now more than four years old and shows no signs of ending. Let's take a look at the latest data.

Housing Starts, Permits And Homebuilder Sentiment Remain Recessionary

Housing starts are new residential construction projects that have actually begun. Housing permits are permits issued by local authorities to authorize future residential construction. Starts are an excellent indicator of coincident housing activity, but they can be volatile month to month. Permits are the better leading indicator, since they show how much construction activity is likely in the coming months and reflect homebuilders' confidence in future demand and financing conditions.

Both starts and permits fell in August. Housing starts came in at a seasonally adjusted annual rate of 1.275 million, down 2.6% from July's revised 1.309 million and down 1.2% from a year ago. Total permits fell to 1.394 million, down 2.7% from July's revised 1.433 million, though still up 3.5% year over year. On the positive side, single-family starts jumped 7.6% to 918K, even as the multifamily side of the market kept sliding. Homebuilders are apparently more willing to break ground on the smaller, cheaper end of the market than on big apartment complexes nobody can afford to fill.

Zoom out and the bigger picture is unmistakable. Permits have fallen 27% since their cycle peak in January 2022 and starts have fallen 26% since their peak in April 2022, as shown below.

Starts

Another good indicator of the housing industry is the NAHB Housing Market Index (HMI), a monthly survey of homebuilder sentiment. The HMI fell 3 points to 32 in September, down from 35 in August and well below the neutral 50 level, a reading rarely seen outside of recessions, as the chart below shows. Current sales conditions fell 4 points to 35. Sales expectations for the next six months fell 6 points to 37. Traffic of prospective buyers held at an abysmal 23, which is not surprising given how unaffordable houses remain at today's prices and rates.

HMI

NAHB Chairman Bill Owens put it plainly, "Buyer traffic has weakened across much of the country, largely because of rising mortgage rates." Chief Economist Robert Dietz added that the HMI is now "at its lowest level since September 2025, as tight lending conditions and elevated land, labor and construction costs persist." Builders are responding the only way a business can when demand dries up: cutting prices. 38% of builders reduced prices in September, up from 35% in August, with the average price cut holding at 6% for a sixth straight month, and 66% are now leaning on sales incentives just to move inventory.

Speaking of affordability, this chart shows how unaffordable housing is for most Americans now. The income needed to afford the median-priced home is $126K, which is 47% higher than median household income of $86K. Only about one-third of home listings are affordable to the typical household. With higher tariffs, oil, inflation and interest rates, consumers are getting squeezed more and more. No wonder consumers are so pessimistic.

Affordabilituy

This Long-Term Stock Chart Is Concerning

The S&P 500 continues to be near the top of a long-running rising wedge pattern, where prices make higher highs and higher lows but the slope of the lows is steeper than the slope of the highs. This is a bearish technical pattern, as it shows a loss of momentum and price is being squeezed into an increasingly narrow range. With a rising wedge, the price is much more likely to fall to the support line (or below), rather than rise above the resistance line. That suggests an unfavorable risk/reward.

SPX

Investment Implications

The housing industry has been in a recession for over four years, homebuilders are cutting prices across the board and unaffordability remains historically high. Higher tariffs and oil prices are adding additional costs that make it politically and economically harder for the Fed to cut rates enough to bail out either homebuyers or an expensive stock market.

Housing has always been one of the most reliable leading indicators of the broader economy, and right now it is flashing the same warning it has been flashing for four years: rates matter, credit expansion has consequences and the bill the Fed ran up in the 2010s and 2020s is still being paid by the American people, one mortgage application at a time.

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