US mortgage rates top 7% for first time in two decades | Business and Economics News

The key 30-year mortgage rate jumped to 7.08% this week, which sharply reduced demand even as house prices continued to rise.

The average long-term mortgage rate in the United States rose above 7% for the first time in more than two decades this week, the result of aggressive rate hikes by the Federal Reserve intended to tame inflation not seen in 40 years.

Mortgage buyer Freddie Mac reported on Thursday that the 30-year average key rate jumped to 7.08% from 6.94% last week. The last time the average rate was above 7% was in April 2002, a time when the United States was still reeling from the September 11 terrorist attacks, but six years from the market crash. real estate market of 2008 that triggered the Great Recession.

This time last year, rates on a 30-year mortgage averaged 3.14%.

“We see this as a mortgage rate spike that is having a pretty dramatic impact on market affordability, significantly reducing demand,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association.

Many would-be buyers have moved away as mortgage rates have more than doubled this year, a trend that has sent the once scorching real estate market into a meltdown.

Sales of existing homes fell for eight consecutive months as borrowing costs have become too high a barrier for many Americans who are already paying more for food, gas and other necessities. Meanwhile, some homeowners have delayed putting their homes on the market because they don’t want to jump into a higher rate on their next mortgage.

Mortgage rates rose sharply along with the 10-year Treasury yield, which climbed as the Federal Reserve is expected to continue raising interest rates in its bid to reduce inflation.

The Fed has raised its benchmark policy rate five times this year, including three consecutive increases of 0.75 percentage points that took its main short-term borrowing rate to a range of 3% to 3.25%, its highest level since 2008. At a meeting in late September, Fed officials forecast that early next year they would raise their key rate to around 4.5%.

Although mortgage rates don’t necessarily reflect Fed rate increases, they tend to track the yield of the 10-year Treasury. This is influenced by a variety of factors, including investor expectations for future inflation and global demand for US Treasuries.

The Fed is expected to raise its key rate by another three-quarters of a point when it meets next week. Despite rate hikes, inflation barely budged from 40-year highs above 8 percent at the consumer and wholesale level.

The Fed’s rate hikes showed signs of a cooling economy. But the rate increases have appeared to have little effect so far on the labor market, which remains strong with the unemployment rate matching a 50-year low of 3.5% and layoffs still at historic lows.

Rising interest rates and rising house prices

Higher mortgage rates reduce homebuyers’ buying power, meaning fewer people can afford to buy a home at a time when house prices continue to climb, albeit more slowly than they did at the start of this year.

The combination of higher rates and house prices means that a typical mortgage payment for a homebuyer is up hundreds of dollars from where it was earlier this year.

The monthly payment for a home at the median price is 78% higher today than a year ago for buyers who are able to afford a 20% down payment. That translates to a $1,000 increase in the typical home payment over the past year alone, according to Realtor.com.

To deal with this, some buyers opt for adjustable rate mortgages, which do not make it easier to qualify for financing, but offer lower monthly payments in the first years of the loan term.

These loans have become less attractive over the past two years as average long-term mortgage rates have fallen to historic lows. But in August, they accounted for about 20% of home loans, said Selma Hepp, chief economist at CoreLogic.

“It speaks to the reduction in purchasing power that consumers are facing due to rising mortgage rates,” she said.