The mortgage and housing industries are in for a bleak finish to 2026 if the market’s performance in September is any indication.

Mortgage rates that climbed last month to their highest levels in nearly three years hit the brakes on home sales that declined 5.6% last month and landed 2.5% lower than a year ago, according to preliminary market data published this week by Zillow.

Perhaps of greater concern for teams hoping to hit their quotas by the end of the year was a more than 8% annual drop in pending home sales, the listings platform said. Pending contracts in September, which were more than 11% lower than August, are a leading indicator of anticipated closed contract volumes in October and November.

“We expect sales to remain lower than last year through the fourth quarter,” said Mischa Fisher, chief economist at Zillow, who authored the report.

Mortgage rates boxing in sales

September is typically a slower season for sales. However, the run-up in mortgage rates last month pushed average principal and interest payments 6.7% higher year over year for borrowers applying for the most popular home loans underwritten by Fannie Mae and Freddie Mac.

Between elevated home prices, insurance costs, property taxes and mortgage rates, affordability remains the dominant concern for homebuyers around the country, experts tell Scotsman Guide. It has been that way for the past four years since the Federal Reserve first hiked interest rates substantially in 2022 to rein in pandemic-era inflation.

Rising inventory levels across the country have shifted market dynamics in favor of homebuyers, with regional variations. Home prices have responded somewhat as buyers gained negotiating power, increasing just 1% nationally in September, according to Zillow data.

But buyer demand remains slow overall, and sellers are responding to those market signals, too. Many buyers in today’s market are recent sellers who had built up home equity, so while first-time purchasers have struggled to access the market, overall turnover is broadly stagnant.

Active housing inventory was 2.5% higher year over year in September, but 1.5% lower than August. New listings, which have struggled to rise throughout 2026 and are also suppressed by mortgage rate lock-in effects, were up just 0.4% from a year ago and down 3.9% from August.

“While there are still more homes for sale than recent years, the growth of new inventory is slowing, so home values are more likely to remain relatively flat rather than decline outright,” explained Fisher.

Slow buyer demand pressures rents

Persistent affordability challenges led to median-income households spending an average of 34.3% of monthly income on mortgage payments in September, according to Zillow’s assessment. That is up from a year ago, when it was 33.7%.

Those affordability dynamics also carry implications for the rental market, where median-income households needed to spend 26.3% of their income on monthly rent payments last month.

As more prospective homebuyers are sidelined, however, higher demand has pushed up typical rents, which posted 2.7% annual growth in September — the fastest pace since April 2025. While slow sales in September were “predictable,” according to Fisher, he called the pace of rent growth “more surprising.”

“Buyers on the margins are finding the monthly savings for renting too good to pass up, even if their long-run goal is still to purchase a home,” said Fisher.