The average long-term mortgage rate has continued to rise, surpassing 7% this week and reaching its highest level since 2001. This is yet another challenge for potential homebuyers, who are already grappling with increasing home prices and a limited supply of properties on the market. According to Freddie Mac, the average rate for a 30-year home loan has increased to 7.23% from 7.09% last week. A year ago, the rate stood at 5.55%. This marks the fifth consecutive weekly increase and brings the rate to its highest point since June 2001, when it reached 7.24%.
The rise in rates can significantly impact borrowers, adding hundreds of dollars to their monthly costs and restricting their affordability in an already unaffordable market. Additionally, these high rates deter homeowners who took advantage of lower rates two years ago from selling their properties. The increase in mortgage rates is directly related to the surge in the 10-year Treasury yield, which lenders use as a basis to set mortgage and loan rates. As the yield rises in response to signs of the US economy’s resilience, bond traders expect increased inflationary pressure, which could motivate the Federal Reserve to maintain higher interest rates for a longer period.
Prospective buyers not only have to contend with high rates but also face a scarcity of available properties on the market. Sam Khater, the chief economist at Freddie Mac, explains that the ongoing economic strength will likely continue to push rates upwards in the near future, given that the 30-year fixed-rate mortgage is now at its highest level since 2001. High inflation has led the Federal Reserve to raise its benchmark interest rate eleven times since March 2022, resulting in the highest fed funds rate in 22 years. Although mortgage rates do not directly mirror the Fed’s rate hikes, they tend to follow the yield on the 10-year Treasury note. Therefore, investors’ expectations of future inflation, global demand for US Treasurys, and the Fed’s interest rate decisions can influence home loan rates.
Compared to two years ago, when it was a mere 2.87%, the average rate on a 30-year mortgage remains more than double. The historically low rates during that period spurred a surge in home sales and refinancing. However, the current sharp increase in rates has led to a shortage of available homes as homeowners who locked in lower borrowing costs are now hesitant to sell and take on higher rates for new properties. This is a significant factor contributing to the nearly 21% decrease in new home listings nationwide in July compared to the previous year, as reported by Realtor.com. Furthermore, the limited housing supply is also impacting the sales of previously occupied homes, which have declined by 22.3% in the first seven months of this year compared to the same period in 2022. The average rate for 15-year fixed-rate mortgages, favored by those refinancing their homes, increased to 6.55% from 6.46% last week. A year ago, it averaged 4.85%, according to Freddie Mac.
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