The average long-term mortgage rate in the United States climbed this week to its highest level in more than 20 years, grim news for potential buyers already challenged by a housing market that remains competitive due to a shortage of homes for sale.
Mortgage buyer Freddie Mac said on Thursday the average rate on the benchmark 30-year home loan rose to 7.09% from 6.96% last week. A year ago, the rate averaged 5.13%.
This is the fourth consecutive weekly increase in the average rate and the highest since the beginning of April 2002, when it averaged 7.13%. The last time the average rate was above 7% was last November, when it stood at 7.08%.
High rates can add hundreds of dollars a month in costs for borrowers, limiting what they can afford in a market already unaffordable for many Americans.
“With prices even higher than they were a year ago in many markets, breaking the 7% mortgage rate threshold again could be what triggers a major contraction in the housing market this fall” said Lisa Sturtevant, chief economist for Bright MLS.
The latest rate hike follows a sharp rise in the 10-year Treasury yield, which topped 4% this month and continues to climb. The yield, which lenders use to set rates for mortgages and other loans, hit its highest level since October on Thursday morning, and is close to its 2007 level.
Yield rose as bond traders react to more reports showing the U.S. economy remains remarkably resilient, which could keep upward pressure on inflation, giving the Federal Reserve a reason to hold rates steady. higher interest for longer.
“The economy continues to do better than expected and the 10-year Treasury yield has risen, driving mortgage rates higher,” said Sam Khater, chief economist at Freddie Mac. “Demand has been impacted by headwinds in affordability, but low inventory remains the root cause of stalled home sales.”
High inflation has prompted the Federal Reserve to raise its benchmark interest rate 11 times since March 2022, pushing the federal funds rate to the highest level in 22 years.
Mortgage rates do not necessarily reflect Fed rate hikes, but tend to track the yield of the 10-year Treasury. Investors’ expectations about future inflation, global demand for US Treasuries, and what the Fed does with interest rates can influence mortgage rates.
The average 30-year mortgage rate remains more than double what it was two years ago, when it was just 2.86%. These ultra-low rates have spurred a wave of home sales and refinancing. The steeply higher rates are now contributing to a shortage of available homes, as homeowners who locked in those lower borrowing costs two years ago are now reluctant to sell and jump into a higher rate on new property.
The lack of housing supply is also one of the main reasons why home sales fell 23% in the first half of this year.
The average rate on 15-year fixed-rate mortgages, popular with those refinancing their homes, rose to 6.46% from 6.34% last week. A year ago, it averaged 4.55%, Freddie Mac said.
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