The key 30-year mortgage rate rose to 7.08% this week, sharply dampening demand, even as home prices continue to rise.
Average US long-term mortgage rates hit 7% for the first time in more than two decades this week, Federal Reserve results strong interest rate increase determined to dominate Inflation not seen in about 40 years.
Mortgage buyer Freddie Mac reported on Thursday that the average of the 30-year key rate rose to 7.08 percent from 6.94% last week. The last time the average was above 7 percent was April 2002, when the United States was still reeling from the September 11 attacks, but six years later the 2008 housing market crash. caused the Great Depression.
Last year at this time, the average 30-year mortgage rate was 3.14%.
“We really see this as a spike in mortgage rates, which has a pretty big impact on affordability in the market,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association. sharp drop in demand”.
Many potential homebuyers have turned to the sidelines as mortgage rates have more than doubled this year, a trend that has sent the once fiery housing market into a slump.
Sales of existing homes fell because eight months in a row because borrowing costs have become too high a barrier for many Americans already paying more for food, gas and other necessities. Meanwhile, some homeowners have refused to put their homes on the market because they don’t want to jump into higher rates on their next mortgage.
Mortgage rates have surged along with 10-year Treasury yields, which are rising amid expectations that the Federal Reserve will continue to raise interest rates in an effort to reduce inflation.
The Fed has raised its key benchmark lending rate five times this year, including three consecutive 0.75 percentage point increases that have brought their key short-term borrowing rate to around 3% to 3.25%. , the highest level since 2008. Finally. At their meeting in late September, Fed officials expected that early next year they would raise the key interest rate to around 4.5%.
While mortgage rates don’t necessarily reflect Fed rate hikes, they tend to track yields on 10-year Treasury notes. That is influenced by many factors, including investors’ expectations for future inflation and global demand for US Treasuries.
The Fed is expected to raise its benchmark interest rate by three-quarters of a point when it meets next week. Despite the rate increase, inflation has barely changed from a 40-year high, above 8% at both the consumer and wholesale levels.
The Fed’s rate hike has shown some signs of cooling down the economy. But so far, the rate hike doesn’t appear to have much effect on the job market, which has remained strong with unemployment matching a 50-year low of 3.5% and layoffs remaining flat. historical low.
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Higher mortgage rates reduce the purchasing power of homebuyers, resulting in fewer people being able to afford a home at a time when home prices continue to climb, albeit more slowly than earlier this year.
The combination of higher rates and home prices means the typical mortgage payment for homebuyers will be up hundreds of dollars from their levels earlier this year.
The monthly payment on an average priced home is now 78% higher than it was a year ago for buyers able to pay 20% up front. According to Realtor.com, this means that the typical home payment has grown by $1,000 in the last year alone.
In response, some homebuyers are opting for adjustable-rate mortgages, which don’t make qualifying any easier, but offer monthly payments. lower in the first few years of the loan term.
Such loans have become less attractive over the past few years as average long-term mortgage rates fall to all-time lows. As of August, they accounted for about 20% of home loan origination, said Selma Hepp, chief economist at CoreLogic.
“It speaks to the reduction in purchasing power that consumers are facing because of higher mortgage rates,” she said.