Mortgage rates in the United States have reached their highest level in nearly 23 years, causing concern for potential homebuyers and impacting the affordability of homeownership. According to Freddie Mac, the average rate on a 30-year fixed-rate loan rose to 7.49%, up from 7.31% the previous week. The average rate on a 15-year mortgage also increased to 6.78% from 6.72%.

Multiple factors are contributing to the surge in mortgage rates, including shifts in inflation, the job market, and uncertainty surrounding the Federal Reserve's next move. This increase in rates is causing a decline in homebuyer demand, as potential buyers are being priced out of the market.

The rise in mortgage rates is not the only issue affecting the cost of homeownership. Many homeowners who secured a lower rate during the pandemic are choosing not to sell their properties due to the fear of having to purchase another home at today's elevated rates. This hesitation to sell has resulted in a depletion of homes available for sale, leading to a dip in inventory and subsequently driving up home prices.

In August, the national median existing home price rose to $407,100, a 3.9% increase from the previous year. The typical mortgage payment also reached $2,170, an 18% increase from the previous year. This combination of rising mortgage rates and a shortage of properties for sale has worsened the affordability crisis, with prices remaining near all-time highs.

Moreover, the impact of higher mortgage rates can be seen in the decline of sales of previously occupied homes, which fell by 21% in the first eight months of this year compared to the same period in 2022. Several cities, including Boston, Chicago, Miami, San Diego, and Washington, D.C., have experienced significant year-over-year increases in home prices.

However, there may be a glimmer of hope on the horizon. Selma Hepp, Chief Economist at CoreLogic, suggests that with a slower buying season ahead and the surging cost of homeownership, additional monthly price gains may taper off. This could potentially provide some relief to aspiring homeowners.

The increase in mortgage rates is part of a larger trend, as the cost of financing a home has been steadily climbing. The average long-term US mortgage rate is now at its highest level since December 2000. The average rate on the benchmark 30-year home loan rose to 7.49% from 7.31% the previous week, while borrowing costs on 15-year fixed-rate mortgages also increased. These high rates are adding hundreds of dollars a month in costs for borrowers, making homeownership even more unaffordable for many Americans.

The combination of elevated rates and low home inventory has had a significant impact on the housing market. Sales of previously occupied US homes have fallen by 21% in the first eight months of this year compared to the same period in 2022. Home loan applications have also dropped to the lowest level since 1995, indicating the limited affordability for potential homebuyers.

The increase in mortgage rates is closely tied to the rise in the 10-year Treasury yield, which lenders use as a guide to pricing loans. Worries that the Federal Reserve will keep its main interest rate high for an extended period to combat inflation have caused the yield to surge in recent weeks. The yield on the 10-year Treasury reached its highest level since 2007 on Tuesday, hitting 4.80%. However, it has since eased back to 4.71% in midday trading Thursday, after being around 3.50% in May and just 0.50% at the beginning of the pandemic.

The gap between the 10-year Treasury yield and the rate on a 30-year fixed-rate mortgage has typically been around 3 percentage points. However, Lisa Sturtevant, Chief Economist at Bright MLS, suggests that as the Treasury yield approaches 5%, an 8% mortgage rate does not seem unlikely. The expectations for future inflation, global demand for US Treasurys, and the actions of the Federal Reserve can all influence home loan rates.

The current surge in mortgage rates and the subsequent impact on the housing market are creating significant challenges for potential homebuyers. The combination of rising rates, limited inventory, and soaring home prices is making homeownership increasingly unaffordable for many Americans.