The average mortgage interest rate has risen to 7.09% , the highest level in more than 20 years, according to data released by mortgage giant Freddie Mac on Thursday (17.08.2023).
This increase extends a long stretch of high borrowing costs that have slowed the housing market. It was the first time since last fall that the rate on a 30-year fixed-rate mortgage rose above 7%. A year ago, rates were around 5%.
Negative impact on economic growth
The housing market is the part of the economy most directly affected by the Federal Reserve's high rate policy. The resulting slowdown in refinance and purchase activity has hit some mortgage lenders, leading to tens of thousands of layoffs in the industry and negatively impacting economic growth.
Mortgage interest rates are not directly linked to central bank actions. But they tend to move freely with the 10-year government bond yield, which on Thursday reached its highest level since 2007. Some analysts see plenty of room for the 10-year yield to continue rising as markets brace for the possibility that rates won't fall so soon.
Investors are again worried about rate hikes
Stocks fell on Thursday, extending August's decline, with investors again worried about continued Fed rate hikes. Fed officials still see inflation risks and a potential need for higher interest rates, according to meeting minutes released last week.
When the Fed began raising interest rates at a rapid pace last year , the rising cost of borrowing to buy a home was expected to be temporary. After a year and a half, rates are climbing back to their highs, despite briefly dipping to 6% in late 2022 and early 2023.
Now buyers, sellers, investors and real estate players are adjusting to the idea that higher rates are here to stay, or at least here to stay longer than they expected.
Lower interest of buyers
While many potential buyers are struggling to find anything they can afford , many potential sellers feel stuck in place. Many homeowners are reluctant to put their homes on the market, fearful of giving up low-rate mortgages and being forced to take out much more expensive loans. High-rate homeowners who recently bought and hoped to be able to refinance soon are finding that they will have to wait a while.
Some buyers gave up and decided to rent longer than they planned. But even with fewer buyers interested, the lack of supply is still pushing prices higher.
Reasonable price of the house 410 thousand USD
According to the latest available data from the National Association of Realtors, the median price of an existing home in June was over $410,000. This was down slightly from the peak reached a year ago, but still the second highest price on record.
A few years ago, during the height of the pandemic, rates fell to record lows below 3%. This triggered a flurry of purchases that drove up prices sharply in US cities such as Phoenix and Las Vegas, with a particular surge in house prices.