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US home mortgage rates jump by the most since 1987

US mortgage rates have risen the most in 35 years as inflation rises and interest rates rise, putting many first-time homebuyers at risk of being sidelined.

According to mortgage lender Freddie Mac, the average interest rate on a 30-year mortgage has risen more than half a percentage point to 5.78 percent, the highest level since November 2008.

Line chart of average interest rate on a 30-year fixed-rate mortgage jumps to its highest level since 2008

The weekly increase was the strongest since 1987. At the start of the year, interest rates were 3.2 percent, while a year ago, before the Federal Reserve launched an aggressive campaign to raise rates, the 30-year fixed-rate mortgage averaged 2.93. per cent.

The rapid acceleration threatened to cool a strong housing market as Americans — many who worked from home during the coronavirus pandemic — took advantage of lower mortgage rates to buy homes, pushing prices to record highs.

But the recent rise in mortgage rates has compromised affordability for new home buyers, slowing housing demand.

“The average homebuyer today faces higher mortgage payments as part of their income than last seen at the height of the boom in the mid-2000s,” said Matthew Pointon, senior real estate economist at Capital Economics. “Because prudent lenders are not determined to ease mortgage lending standards, many potential buyers will be locked out of the market. The share of the first buyer has recently fallen to a 13-year low.”

Home buyers stunned by the rapid rise in mortgage rates can look to the Federal Reserve’s efforts to tame US inflation, which hit a new 40-year high last month, as well as rising inflation expectations, suggesting that Americans are more concerned about the outlook and their finances. The Fed raised interest rates by 0.75 percentage point on Wednesday, the largest increase since 1994.

“These higher rates are the result of a shift in expectations about inflation and the stance of monetary policy,” said Sam Khater, chief economist at Freddie Mac. “Higher mortgage rates will moderate the blazing pace of housing activity that we have experienced during the pandemic, ultimately resulting in a more balanced housing market.”

Moderation is already beginning to be seen in the data as the pace of US home construction fell in May to its lowest pace since April 2021.

The number of housing projects in the US fell 14.4 percent month over month to an annual rate of 1.5 million, according to the trade department. Building permits, considered a leading indicator of the housing market, fell 7 percent from the previous month to an annualized rate of 1.69 million.

Sentiment among homebuilders declined for the sixth consecutive month in June, as inflation and higher mortgage rates reduced demand for new homes.

The recent rise in mortgage rates was calculated ahead of the Federal Reserve’s rate-setting meeting this week. Fed officials have signaled that the key rate could rise well above 3 percent by the end of the year.

“Mortgage rates are often discounted from the 10-year” [Treasury note] yield for fixed-rate mortgages,” said Joshua Shapiro, chief US economist at MFR. “Mortgage rates will probably continue to rise, but I think we’ve seen most of the increase.”

Still, high interest rates will slow economic growth, impacting consumer spending, leading to a decline in home sales. Nancy Vanden Houten, chief economist at Oxford Economics, said there is a chance that long-term interest rates will remain stable.

“If the Fed’s aggressive stance leads to a slowdown in economic growth and inflation, long-term interest rates could stabilize,” said Vanden Houten. “Or begin to fall, even if the Fed continues to raise short-term interest rates.”

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