Mortgage rates have once again surged past 7%, hitting an average of 7.03% for a 30-year fixed mortgage this week, up from 6.94% the previous week, according to Freddie Mac. This marks a return to higher rates that have predominantly hovered above 7% since mid-April, after a brief period of decline.
The upward trajectory in mortgage rates comes in the wake of recent statements from Federal Reserve officials indicating that any reduction in benchmark rates will depend on further declines in inflation. Additionally, the possibility of future rate hikes remains on the table if inflation data continues to fall short of expectations. This hawkish stance has led to an immediate impact on homebuyers, who are highly sensitive to financing costs in an already challenging market.
"More hawkish commentary about inflation, combined with economic signals that have moved sideways over the last few weeks, have resulted in mortgage rates drifting higher as markets continue to dial back expectations of interest rate cuts," said Sam Khater, Freddie Mac's chief economist.
The Mortgage Bankers Association reported a dip in both buying and refinancing activity. Purchase applications fell by 1% from the previous week, while refinancing activity dropped by 14%. Overall mortgage demand is now 10% lower than it was at the same time last year.
"Borrowers remain sensitive to small increases in rates, impacting the refinance market and keeping purchase applications below last year's levels," said Joel Kan, MBA's vice president and deputy chief economist. He added that homebuyers are continuing to struggle to find homes within their budget.
According to Freddie Mac, mortgage rates have fluctuated between the mid-6% and mid-7% range this year. Current borrowing costs are more than double what they were three years ago when rates hovered around 3%. At today's average rate, a homebuyer would pay $1,600 monthly on a $300,000 home with a 20% down payment, according to the Yahoo Finance mortgage calculator.
The majority of homeowners with mortgages, about nine in ten, have an interest rate below 6%, according to Redfin. This disparity has led to a "lock-in effect," where many homeowners are choosing not to sell their homes to retain their advantageous rates. Consequently, this has exacerbated the inventory shortage in the housing market.
In April, the number of available single-family homes for sale was around 1.2 million, a decade low except for during the pandemic when listings were around 1 million units, Redfin data shows. Active listings are 30% lower than in April 2019 and represent about a 3.5-month supply, well below the six-month supply considered balanced by the National Association of Realtors (NAR).
"We want more supply, more supply, more supply," said Lawrence Yun, chief economist at the NAR.
The rise in mortgage rates has intensified the home affordability crisis, further dampening demand in the housing market. Freddie Mac's latest Primary Mortgage Market Survey highlighted this trend, with the average rate on the benchmark 30-year fixed mortgage climbing to 7.03% this week from 6.94% last week. The average rate on a 30-year loan was 6.79% a year ago.
The average rate on the 15-year fixed mortgage also increased, reaching 6.36% from 6.24% last week. A year ago, the rate on a 15-year fixed note averaged 6.18%.
The ongoing rise in mortgage rates has had a profound impact on both buyers and sellers. Buyers are finding it increasingly difficult to afford homes, and sellers are reluctant to put their properties on the market, further constraining supply.
According to the NAR, the share of homes sold above the asking price reached nearly 35% in April, indicating a highly competitive market despite the challenges posed by rising rates. This competitive environment has made it even harder for buyers to find affordable homes, as they are often outbid.
The current economic environment, characterized by high inflation and the Federal Reserve's cautious stance on rate cuts, suggests that mortgage rates may remain elevated for the foreseeable future. This outlook is likely to continue to strain the housing market, affecting both supply and demand.
As the market adapts to these higher rates, potential homebuyers may need to adjust their expectations and consider alternative financing options or different market segments. Similarly, policymakers and industry stakeholders will need to explore solutions to address the affordability crisis and support the broader housing market.
