The employment report for September, finally published by the Bureau of Labor Statistics this week, suggests that the labor market weakened in the late summer and early fall.
The bureau revised its earlier estimates to show 7,000 fewer jobs in July than originally reported and said that employment actually declined in August by 4,000 jobs.
Although employment grew again in September — at least according to the initial estimate — the bureau acknowledged that employment "has shown little change since April" and that the unemployment rate in September had risen 0.3 percentage points since in the same month a year earlier.
Unless employment conditions improve (or inflation gets worse), policymakers on the Federal Reserve's Federal Open Market Committee are weighing whether to reduce reduce interest rates further at their next meeting in December.
Members had already expressed concern about a weakening job market at their previous meeting in late October, when they reduced their short-term policy rate (otherwise known as the federal funds rate) by 0.25%. Fed watchers now predict the likelihood of a further cut in December is greater than two-thirds.
A further cut in the short-term interest rate would not necessarily reduce mortgage interest rates, but the Fed also adopted an important policy change that should help make homebuying more affordable: It decided in October to end the "quantitative tightening" policy that had been in place since 2022.
Quantitative tightening, or "QT," had put upward pressure on interest rates for loans with longer maturities, including mortgages. So ending QT will tend to reduce mortgage interest rates as long as other factors don't push them back up. Because of that, the Fed's decision will likely provide a boost to housing affordability, improving sentiment among prospective homebuyers.
As if to confirm the signs of improvement in housing market conditions, sales of existing homes increased in October — after three months of decline — and are now 10,000 higher than in the same month last year, according to the National Association of Realtors.
The Midwest region of the country saw the most significant increase at 5.3%, with 50,000 more existing homes sold in October than in September. Sales also increased in the South, but remained unchanged in the Northeast and declined in the West.
On a year-over-year basis, the most substantial relative gain was in the Northeast, at 4.3%, although the much larger South region saw the biggest increase in the number of existing homes sold at 50,000 more than in October 2024. The year-over-year increase was not as strong as it had been in September, but otherwise was the strongest year-over-year growth since January.
Sentiment among prospective homebuyers has likely been boosted by the fact that house prices have continued to increase only moderately, while mortgage interest rates have generally declined since late May — that is, even before the Fed's QT decision. (Mortgage rates ticked back up very slightly this week, but not enough to raise concerns that homebuyer sentiment might be stifled.)
Sentiment has also improved very slightly among builders of new homes, although it had been weak and remains so. The National Association of Home Builders reported survey results from early November showing that builders believe "current sales conditions" have become slightly more favorable and the number of prospective buyers has increased.
The improvement in new-home sales activity likely reflects price cuts and increasing supply as well as the effect of lower mortgage rates: The home builders' association reported that more than 40% of builders had cut prices on new homes, and the Census Bureau confirmed increases in the number of new homes completed in both July and August.
Looking forward, however, the supply of new homes seems unlikely to keep up with demand, especially if mortgage interest rates continue to decline. The Census Bureau reported declines during both July and August in the number of new single-family homes started, and the number currently under construction tumbled by more than 15,000 in August.
Moreover, the number of permits issued for new single-family homes declined for four straight months and, as of August, was 13,400 fewer than at the same time last year. The Census Bureau has not yet said when it may be able to release more-recent data, but it would be quite surprising if home construction activity has increased meaningfully since August.
The current homebuying market appears balanced, with relative stability in house prices and a moderate decline in interest rates resulting in slightly increased homebuying activity.
Recent increases in the inventory of homes available for purchase are likely to continue boosting sales at least through early 2026. In the future, however, unless we see substantial growth in the number of existing homes put on the market, increased demand boosted by lower mortgage interest rates may collide with a decline in new construction to generate a supply shortage.