The average long-term U.S. mortgage rate topped 7% for the first time in more than two decades this week, a result of the Federal Reserve’s aggressive rate hikes intended to tame inflation not seen in some 40 years.
Mortgage buyer Freddie Mac reported Thursday that the average on the key 30-year rate jumped to 7.08% from 6.94% last week. The last time the average rate was above 7% was April 2002, a time when the U.S. was still reeling from the Sept. 11 terrorist attacks, but six years away from the 2008 housing market collapse that triggered the Great Recession.
Other measures put borrowing costs for a home loan even higher. The Mortgage Bankers Association said Wednesday that the rate on a conventional 30-year mortgage. Last year at this time, rates on a 30-year mortgage averaged 3.14%.
“As inflation endures, consumers are seeing higher costs at every turn, causing further declines in consumer confidence this month,” Freddie Mac Chief Economist Sam Khater said in a statement. “In fact, many potential homebuyers are choosing to wait and see where the housing market will end up, pushing demand and home prices further downward.”
The Fed has raised itsfive times this year, including three consecutive 0.75 percentage point increases that have brought its key short-term borrowing rate to a range of 3% to 3.25%, the highest level since 2008. At their last meeting in late September, Fed officials projected that by early next year they would raise their key rate to roughly 4.5%.
Mortgage rates don’t necessarily mirror the Fed’s rate increases, but tend to track the yield on the 10-year Treasury note. That’s influenced by a variety of factors, including investors’ expectations for future inflation and global demand for U.S. Treasurys.
Many potential homebuyers have moved to the sidelines as mortgage rates have more than doubled this year. Sales of existing homes have declined for eight straight months as borrowing costs have become too high a hurdle for many Americans already paying more for food, gas and other necessities.
Higher rates translate into very real costs for homebuyers. Take a home that sells for the U.S. median price of $384,800 and that is purchased with a 20% down payment. At the current mortgage rate of 7.16%, a homebuyer would pay roughly $750 more per month than with a loan at 3.2%, the rate in early 2022.
Meanwhile, some homeowners have held off putting their homes on the market because they don’t want to jump into a higher rate on their next mortgage.
Home prices expected to fall
Housing prices rose roughly 40% during the pandemic, according to Freddie Mac. But the picture next year is likely to be different.
“As the labor market cools off, housing demand will remain weak in 2023, potentially resulting in declines in prices next year,” the lender said in a recent report. “However, home price forecast uncertainty is wide due to interest rate volatility and the potential of a recession on the horizon.”
The Fed is expected to raise its benchmark rate another three-quarters of a point when it meets next week. Despite the rate increases, inflation has hardly budged from 40-year highs, above 8% at both the consumer and wholesale level.
The Fed rate increases have shown some signs of cooling the economy. But the rate increases have seemed to have little effect on the job market yet, which remains strong with the unemployment rate matching a 50-year low of 3.5% and layoffs still historically low.