As concerns around inflation persist, mortgage rates climbed above 6 percent this week, their highest point since late 2008 and more than double their level a year ago, further squeezing the budgets of would-be home buyers and cooling off a once red-hot housing market.
Mortgage rates have been on the rise since the start of the year as the Federal Reserve has affirmed its commitment to raise its key interest rate to tame soaring consumer prices. With inflation remaining stubbornly high in August, the Fed is expected to raise the federal funds rate again when it meets next week. It has already increased rates 2.25 percentage points in four actions since May.
Mortgage rates do not directly track the Fed’s key interest rate, as credit cards do, but they are influenced by it. Instead, they tend to track the yield on 10-year Treasury bonds, which are driven by the outlook for inflation and expectations around the Fed’s action.
“The housing market is the most sensitive to the Federal Reserve’s policy,” said Lawrence Yun, the chief economist at the National Association of Realtors. “High inflation requires the Fed to be even more aggressive than previously assumed, and, therefore, the broad bond market — including the mortgage market — has reacted.”
The average rate on a 30-year fixed-rate mortgage, the most popular home loan, was 6.02 percent as of Thursday, Freddie Mac reported, up from 5.89 percent the week before. The average rate for an identical loan was 2.86 percent the same week in 2021.
Sam Khater, Freddie Mac’s chief economist, said in a statement that the rate increase would help cool the housing market but that the number of homes for sale was still inadequate to meet demand.
“This indicates that while home price declines will likely continue, they should not be large,” he said.
The rate on a 30-year fixed-rate mortgage may feel particularly high given its recent history; it was 3.72 percent at the beginning of 2020 and spent much of the past two years below 3 percent. With a longer view, however, rates averaged about 7.8 percent over the past half-century, according to Freddie Mac, which began tracking borrowing costs in 1971. In the early 1980s, rates stretched well into the double digits, exceeding 18 percent in 1981.
But the combination of higher mortgage rates and already inflated home prices has significantly limited what prospective home buyers can afford, pushing many of them out of the market.
With a down payment of 10 percent on the median home price listed in the database on Realtor.com, the typical monthly mortgage payment is now roughly $2,352, up 66 percent from $1,416 a year ago, taking both higher home prices and interest rates into account.
And that doesn’t account for other expenses — like potentially higher closing costs, along with property taxes, homeowner’s insurance and mortgage insurance, which is often required on down payments of less than 20 percent.
“There is serious sticker shock,” said Glenn Kelman, the chief executive officer of Redfin, the real estate brokerage, which announced in June that it would cut about 8 percent of its work force because of lower demand. “It is just a really thinly traded market. It is hard to put deals together.”
Higher rates have certainly been a driving factor, but the uncertain economic outlook has also played a role. “Some people have decided: ‘I just can’t buy a house. I am stepping back,’” Mr. Kelman said. “Others are just spooked: ‘I am worried about the stock market.’ ‘I am worried about my job and the broader economy.’”
Demand has dropped swiftly. Mortgage applications were largely flat for the week that ended Sept. 9, rising 0.2 percent from the previous week, according to data from the Mortgage Bankers Association. But applications were down nearly 29 percent from a year earlier.
Refinancing demand has also plummeted: Applications to refinance home loans were down about 4 percent from last week, but dropped 83 percent from the same week a year earlier.
Home sales are down 13 percent year to date, said Selma Hepp, lead economist at CoreLogic, a real estate data analytics firm. “Further increases in mortgage rates, beyond 6 percent, on a 30-year fixed rate mortgage will exacerbate affordability challenges,” she said.
Home price growth has also slowed, Ms. Hepp said, but the current “recalibration” is a positive outcome of higher rates. “All these were intended consequences of tightening of financial conditions and mean healthier housing markets ahead,” she said.
There could be other ripple effects. With fewer home sales, more people will continue to rent, potentially causing rent costs to go up.
“Rising rents significantly impact consumer price inflation,” said Mr. Yun of the National Association of Realtors. “In a sense, at least for the short term, raising interest rates will further push up inflation.”
And if higher rates cause more homeowners to remain in their homes — unwilling to trade in their affordable mortgages for costlier ones — housing inventory could tighten further. “Only by drastically boosting supply of homes, both apartments and for ownership, will housing prices and rents become manageable,” Mr. Yun added.
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