NEW YORK – As concerns around inflation persist, mortgage rates climbed above 6 per cent this week, their highest point since late 2008 and more than double their level a year ago, further squeezing the budgets of would-be homebuyers 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, 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 per cent as of Thursday, Freddie Mac reported, up from 5.89 per cent the week before. The average rate for an identical loan was 2.86 per cent 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 per cent at the beginning of 2020 and spent much of the past two years below 3 per cent. With a longer view, however, rates averaged about 7.8% 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 per cent in 1981.
But the combination of higher mortgage rates and already inflated home prices has significantly limited what prospective homebuyers can afford, pushing many of them out of the market.
With a down payment of 10 per cent on the median home price listed in the database on Realtor.com, the typical monthly mortgage payment is now roughly US$2,352, up 66 per cent from US$1,416 a year ago, taking both higher home prices and interest rates into account.
And that doesn’t account for other expenses – such as 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 per cent.
“There is serious sticker shock,” said Glenn Kelman, CEO of Redfin, a real estate brokerage, which announced in June that it would cut about 8 per cent of its workforce 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,'” Kelman said.
“Others are just spooked: ‘I am worried about the stock market.’ ‘I am worried about my job and the broader economy.'”