In a development that puts significant strain on potential homebuyers, mortgage rates have reached their highest point in nearly 23 years.
According to a statement by Freddie Mac, the average rate for a 30-year fixed loan has risen for the third consecutive week, reaching 7.31%, up from last week’s 7.19%. This is a considerable increase compared to the 6.7% rate recorded a year ago. Not since December 2000 have mortgage rates been this high.
Over the past seven weeks, mortgage rates have exceeded 7%, negatively impacting affordability for buyers and resulting in a cooling effect on purchases. To put it into perspective, the current average rate means that a buyer with a $600,000 mortgage would be paying $4,118 per month, a 58% increase from early 2022 before the Federal Reserve started raising its benchmark rate to counter an overheated economy.
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“Mortgage rates, now at their highest level in over two decades, continued to rise this week as investors adjusted their expectations regarding the strength and resilience of the US economy,” commented Orphe Divounguy, senior macroeconomist at Zillow Home Loans. “However, the impacts of tighter credit conditions, rising oil prices, student loan repayments, and the risk of a prolonged government shutdown are all expected to adversely affect the labor market and moderate economic activity in the coming months.”
Implications for House Hunters
Higher mortgage rates are leading to a decrease in homebuying activity.
The National Association of Realtors reports a 19% drop in contracts to buy previously owned homes since August 2022. The significant decline in pending sales, coupled with reports of slower existing and new home sales towards the end of the summer, indicates a cooling market, as stated by Lisa Sturtevant, chief economist at Bright Multiple Listing Service.
Sturtevant further adds that total home sales for this year might not exceed 4.2 million, marking the lowest level since 2010.
The rise in rates has greatly reduced purchasing power, making it financially unfeasible for many to buy a home.
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“Buyers are reaching affordability limits, causing some to withdraw from the market,” said Sturtevant. “For others, the higher mortgage rates and general economic uncertainty are making them more cautious. In any case, expect the number of home sales transactions this fall to reach a record low in a decade.”
Thus far, the increase in rates has not significantly affected home prices. In fact, in 2000, when rates were last this high, home prices rose by 6% in that year alone and by 60% through 2007, according to the FHFA indexes.
Data released this week by S&P CoreLogic Case-Shiller shows that tight inventory of available homes has driven home values to a record high in July. However, price growth may have its limits. Approximately one in every fifteen homes for sale had their prices reduced by sellers in the four weeks ending September 24, marking the highest level since November, according to Redfin Corp.
Moreover, a Realtor.com study reveals that buying a starter home is now more expensive than renting in all but three of the 50 major metropolitan areas in the US. Realtor.com’s Chief Economist Danielle Hale explains that this is why buyer demand is likely to remain relatively low.
The Factors Behind the Rise in Mortgage Rates
In 2000, rates were high as the Fed attempted to cool down a technology industry-driven economy and its lucrative “dot-com” stocks.
In 2023, mortgage rates surged due to the Fed’s historic campaign to curb inflation. While progress has been made since June 2022, when inflation reached 9.1%, central bankers assert that there is still work to be done.
The core Personal Consumption Expenditures index, the Fed’s preferred inflation measure, currently stands at 4.2%, more than double the Fed’s target of 2%. Economists anticipate a drop to 3.9% when the latest reading is released on Friday.
This report includes contributions from Bloomberg, CNN, and Jonathan Lansner of the Southern California News Group.
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The surge in mortgage rates this week aligns with the notion that rates will remain elevated for a prolonged period, as discussed during the latest Fed policy meeting, according to Hale.
“Revised economic projections indicate that another rate hike is definitely on the table for this year, and the projected policy rates for 2024 and 2025 are also higher than previously anticipated,” Hale stated.
The Fed does not directly determine the interest rates borrowers pay for mortgages, but its actions have an influence. Mortgage rates generally correlate with the yield on 10-year US Treasuries, which fluctuates based on expectations about Fed actions and economic performance. The yield on 10-year Treasuries rose from 4.3% to 4.6% over the span of a week, as reflected in recent figures.
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