Washington, D.C. CNN –
U.S. mortgage rates rose even further this week, reaching 7.49%, putting homeownership even further out of reach for potential homebuyers.
That’s up from 7.31% the week before, according to Freddie Mac data released Thursday. A year ago, the 30-year fixed rate was 6.66%.
“Several factors, including changes in inflation, the labor market and uncertainty about the Federal Reserve’s next move, are contributing to the highest mortgage rates in a generation,” said Sam Khater, chief economist at Freddie Mac. “Unsurprisingly, this is leading to a decline in demand for homes.”
Mortgage rates have skyrocketed during the Federal Reserve’s historic inflation-curbing campaign. The central bank has indicated it may keep interest rates high for longer due to stubborn inflation. That has pushed up the yield on 10-year Treasury bonds, a key benchmark for mortgage rates.
The additional costs of financing a mortgage, along with rising house prices due to the historically low inventory of homes for sale, have caused home affordability to fall to its lowest level in several decades. The result is a sales pace that is more than 20% behind last year at this point in the year, according to the National Association of Realtors.
The average mortgage rate is based on mortgage applications Freddie Mac receives from thousands of lenders across the country. Only borrowers who make a 20% down payment and have excellent credit are included in the survey.
The housing market remains stuck
Potential buyers were extremely sensitive to interest rates and typically pulled out of the market when interest rates rose.
Mortgage rates at their highest in 23 years have continued to depress the housing market, said Bob Broeksmit, president and CEO of the Mortgage Bankers Association.
“Buy applications fell again last week, falling to their lowest level since 1995,” he said. “Despite the recent rise in interest rates, we still expect the 30-year fixed-rate mortgage to decline before the end of the year, providing some relief to potential homebuyers in 2024.”
With homebuyers pulling out of the real estate market while mortgage rates are near 20-year peaks, homeowners are even less likely to put their homes on the market, exacerbating the already tight supply of available homes.
According to Black Knight, a mortgage data company, over 90% of homeowners have mortgage rates below 6%, many significantly lower. They are not interested in trading their low interest rates for today’s higher ones.
Meanwhile, home affordability continues to be a major challenge for many buyers. Prices can rise as home seekers compete for the few homes offered in a market.
“While declining pending home sales and new home sales signaled a slowdown in buyer activity, rising home prices and shorter days on market suggest homebuyers are competing for limited inventory,” said Jiayi Xu, economist at Realtor.com.
While the Fed does not directly set the interest rates borrowers pay on mortgages, it influences them through its actions.
Mortgage rates typically follow the 10-year U.S. Treasury yield, which moves based on a combination of expectations about the Fed’s actions, what the Fed actually does, and investor reactions. When Treasury yields rise, mortgage rates also rise; When they fall, mortgage rates tend to follow.
The 10-year Treasury yield hit 4.80% on Tuesday – its highest level since 2007 – as inflationary pressures persist and the Fed continues to struggle to cool the economy.
“We expect mortgage rates to remain above the 7 percent threshold for an extended period of time,” Xu said.
All eyes are now on the Bureau of Labor Statistics’ September jobs report, due out Friday.
Federal Reserve Chairman Jerome Powell has emphasized the central role that the robust labor market plays in the Fed’s interest rate decisions.
“It is worth noting that at the September FOMC meeting, the Fed forecast an unemployment rate of 3.8% in 2023, compared to 4.1% in June,” Xu said. “The upcoming labor market report for September will tell us whether the economy is in line with forecasts and is very important in clarifying the way forward.”
Analysts say mortgage rates could fall if employment numbers show some weakness. However, if the labor market report is good, interest rates can be expected to rise further.