Mortgage rates reach highest level in more than two decades

Mortgage rates surged on Monday as bond yields rose due to investor concerns about prolonged high interest rates and inflation. The average rate for a 30-year fixed mortgage reached 7.48%, the highest level since November 2000, according to Mortgage News Daily. This marks a 29 basis point increase in just one week.

Matthew Graham, Chief Operating Officer of Mortgage News Daily, explained that investors were disappointed by the lack of economic data deterioration they were expecting. He also mentioned that the Federal Reserve would prioritize short-term rates if a policy shift occurred.

These higher rates have a significant impact on potential homebuyers, exacerbating the challenge of already inflated home prices caused by the pandemic. In 2020, mortgage rates set numerous record lows, triggering a surge in home purchases that drove prices up by over 40% from the start of the pandemic to the summer of 2022. Although prices slightly declined at the end of last year, they are now rising again due to strong demand and limited supply.

The increased mortgage rates worsen the supply situation as current homeowners are hesitant to list their homes for sale. This reluctance stems from the fact that most of them have rates around or below 3%. Moving to a new home would mean more than doubling their current rate, a situation now referred to as “golden handcuffs” among potential sellers.

The affordability gap for buyers compared to a year ago is significant. Last year, the average rate for a 30-year fixed mortgage was approximately 5.5%. For someone purchasing a $400,000 home with a 20% down payment on a 30-year fixed loan, the monthly payment today, including principal and interest, is approximately $420 higher than it would have been a year ago.

As a result, more borrowers are opting for adjustable rate loans that offer lower interest rates for shorter fixed terms. According to the Mortgage Bankers Association, the average rate on a 5-year ARM last week was 6.2%, and the ARM share of applications increased to 7%. In 2020, when the 30-year fixed rate reached multiple record lows, the ARM share was less than 2%.

To counter the impact of higher mortgage rates, homebuilders have been either buying down rates for short or long terms or reducing home prices. Although they had scaled back these incentives earlier this year when demand surged and rates fell, they have recently increased them again. However, homebuilder sentiment dropped significantly in August, with builders primarily attributing it to higher interest rates.