Rising rates a bummer for buyers, but builders are more bullish 

That big rate cut by the Federal Reserve last month? It's now looking like a big bummer for homebuyers.

The 30-year fixed-rate mortgage rose for a third consecutive week, according to Freddie Mac, averaging 6.44%. That's up from 6.32% a week ago and significantly higher than the 6.09% average prior to the Fed's 50-basis point interest rate cut.

The 15-year fixed-rate also continued to climb, averaging 5.63% this week.

Looking at the big economic picture, the upward trend could be seen as good news, said Sam Khater, Freddie Mac's chief economist: "In general, higher rates reflect the strength in the economy that is supportive of the housing market."

But it also means higher borrowing costs for would-be buyers who are already facing high home prices. 

A slow road to recovery

In addition to affordability challenges, competing market forces are impacting sales. A stronger-than-expected economy is a sign that demand is out there, but inventory levels are too low to meet it, said Odeta Kushi, deputy chief economist at First American.

"For the housing market to regain more momentum, it will take both a significant increase in the number of homes on the market and continued affordability improvements," Kushi said. "Until then, while the worst may be behind us, the road to recovery will likely be a slow one."

Although inventory is still rising, the pace has slowed significantly as seasonal patterns kick in. Active listings are up 16% compared to last year, but that's the smallest increase since March, and supply remains well below pre-pandemic levels, according to the latest Redfin report

Builder sentiment improves

The recent rise in mortgage rates hasn't dampened everyone's spirits, however. The homebuilder confidence index rose for the second straight month, according to the National Association of Homebuilders, coming in at 43 in October, up from 41 in September. 

That's still relatively low compared to a few years ago — before mortgage rates began their steady rise — but the upward movement suggests that builders anticipate that inflation will ease and mortgage rates will moderate over the next several months, said Robert Dietz, chief economist at NAHB.

Dietz noted that "uneven declines" in rates will likely boost buyer demand, but "tight lending conditions for development and construction loans" could make it harder for builders to source materials.

Still, ​​"builders are feeling more optimistic about 2025 market conditions," Dietz said, adding that "a wildcard for the outlook remains the election."

Big slowdown in applications

With mortgage rates on the rise, applications to finance a home have dropped off sharply, according to the Mortgage Bankers Association. The MBA reported an overall decline of 17% week-over-week, with refinance applications — which fell 26% — accounting for the bulk of the dropoff. Purchase applications fell 7% for the week but were up 7% compared to a year ago.

There was one bright spot, however, as prospective first-time buyers appear to be forging ahead, said Joel Kan, deputy chief economist for MBA.

"FHA purchase applications were little changed despite the increase in rates, as some first-time homebuyers remain in the market because of improving housing inventory conditions," Khan noted.

Prices still rising, but at a slower pace

Home prices continue to set new records, but not at the torrid pace of recent years. First American's Home Price index estimates a 3.9% year-over-year increase in September, the slowest since the summer of 2023.

Meanwhile, Fannie Mae's index for the third quarter reported a 5.9% increase in home prices. That's slower than the previous quarter, but still relatively strong — further evidence of an ongoing issue with tight supply, said Mark Palim, Fannie Mae's chief economist.