In a blow to prospective homebuyers, mortgage rates have surged to a 21-year high, surpassing 7 percent, exacerbating the challenges of an already difficult housing market. According to Freddie Mac, the average rate for a 30-year fixed-rate mortgage, the most popular home loan in the United States, reached 7.09 percent, up from 6.96 percent the previous week and a significant increase from the 5.13 percent rate observed a year ago. This current rate marks the highest since April 2002.
The housing market had previously experienced a period of falling rates, with some even dropping below 3 percent at the start of the pandemic. However, the abrupt surge in rates has left homeowners feeling trapped and unwilling to sell their properties due to the low rates on their existing mortgages. Consequently, sales of existing homes plummeted by nearly 19 percent in June compared to the previous year, as reported by the National Association of Realtors. Additionally, the median price of an existing home in June stood at $410,200, the second-highest since data tracking began in 1999, with only a marginal decrease from the peak of $413,800 recorded a year ago.
Jeff Ostrowski, an analyst at Bankrate, noted that the current reality has jolted the housing market, leading to a sharp decline in home sales and a reluctance among homeowners to give up their super-low mortgage rates, ultimately impacting housing affordability.
As the scarcity of existing homes persists, potential buyers are increasingly turning to new construction. The Census Bureau reported a nearly 24 percent increase in the sale of new homes in June compared to the same period the prior year. Moreover, housing starts, a measure of new home construction, rose by approximately 6 percent in July compared to the previous year. However, finding affordable options remains a significant challenge for homebuyers.
The Federal Reserve's decision to raise its policy interest rate, the highest in 22 years, has had a ripple effect on borrowing costs across the economy. The central bank's objective is to cool the economy and tackle stubbornly high inflation. While officials at the Federal Reserve anticipate one more rate increase this year, they expect rates to remain elevated for several years before returning to pre-pandemic levels. Mortgage rates typically follow the yield on 10-year Treasury bonds, which are influenced by various factors, including inflation expectations, the Federal Reserve's actions, and investor sentiment. On Thursday, the 10-year yield exceeded 4.3 percent for the first time since 2007.
Overall, with mortgage rates reaching a 21-year high, the housing market is facing significant challenges, driving down home sales and constraining affordability. The scarcity of existing homes has led to an increased demand for new construction, but finding affordable options remains a daunting task for potential buyers. The Federal Reserve's efforts to combat inflation by raising interest rates have further contributed to the current predicament faced by homebuyers.
