FILE PHOTO: A "sold" sign is seen outside of a recently purchased home in Washington, U.S., July 7, 2022. REUTERS/Sarah Silbiger/File Photo

By Lucia Mutikani

WASHINGTON (Reuters) -Contracts to purchase previously owned U.S. homes were unexpectedly unchanged in September, likely as worries about the labor market kept prospective buyers on the sidelines despite declining mortgage rates.

The flat reading in pending home sales last month, which was reported by the National Association of Realtors on Wednesday, followed an upwardly revised 4.2% increase in August.

Economists polled by Reuters had forecast contracts, which become sales after a month or two, would rise 1.0% after a previously reported 4.0% advance in August. Pending home sales dropped 0.9% from a year earlier.

Mortgage rates declined after the Federal Reserve resumed cutting interest rates. The U.S. central bank is expected to lower its benchmark overnight interest rate by another 25 basis points to the 3.75%-4.00% range later on Wednesday.

"It is possible that job market weakness and general economic uncertainty were holding back buyers, though affordability is still an issue," said Abiel Reinhart, an economist at J.P. Morgan.

Contracts dropped 3.4% in the Midwest and slipped 0.2% in the West. They, however, increased 1.1% in the densely populated South and jumped 3.1% in the Northeast.

The average rate on the popular 30-year fixed-rate mortgage dropped to 6.30% at the end of September from about 6.56% in August, data from mortgage finance agency Freddie Mac showed. It has since declined to a one-year low of 6.19%.

But lower mortgage rates have been somewhat overshadowed by growing anxiety over the labor market, with households instead taking advantage of the lower borrowing costs to refinance their mortgages. A report from the Mortgage Bankers Association (MBA) on Wednesday showed refinancing activity surged 9% last week from the prior week, while loans to purchase a home rose 5%.

GOVERNMENT SHUTDOWN IS HURTING HOUSING MARKET

A shutdown of the U.S. government has delayed the release of official labor market reports and other economic data, but independent surveys have suggested lackluster conditions have persisted since the release of the employment report for August, which showed stagnation in job growth and a rise in the jobless rate to nearly a four-year high of 4.3%.

A survey from the Conference Board on Tuesday showed the share of consumers who expected fewer jobs over the next six months increased in October to the highest level since April. The proportion anticipating more jobs over that period was the lowest in six months.

The labor market's sluggishness largely reflects tepid business hiring, with economists saying companies were opting to absorb higher costs from import tariffs at the expense of adding headcount. Companies are also embracing artificial intelligence, undercutting demand for labor.

Amazon.com this week announced big job cuts in favor of automation. Reuters has tracked more than 25,000 layoffs announced by U.S.-based companies this month.

The government shutdown, now in its 29th day, is also pressuring the housing market.

MBA reported more than a 26% drop in applications for a mortgage assistance program run by the U.S. Department of Agriculture for low-income people. The USDA said on its website the program assists low- and very-low-income applicants to afford housing in eligible rural areas by providing short-term payment assistance.

HomeAbroad, a real estate investment technology platform, said earlier this month that the shutdown was hindering access to insurance coverage for prospective homeowners in flood-prone areas, and warned that 108,570 home closings were at risk if it lasted a month, costing an estimated $47.68 billion.

(Reporting by Lucia Mutikani; Editing by Paul Simao)