HomeBusinessMortgage rates rise again, squeezing more buyers out of the housing market

Mortgage rates rise again, squeezing more buyers out of the housing market

The 30-year fixed-rate mortgage averaged 5.81% in the week ending June 23, down from 5.78% the previous week, according to Freddie Mac.

This time last year, rates averaged 3.02%, and the last time they were this high was in the winter of 2008.

“Fixed mortgage rates have risen more than two percentage points since the start of the year,” Sam Khater, chief economist at Freddie Mac, said in a statement. “The combination of rising rates and high home prices is the likely driver of recent declines in existing home sales. However, in reality, many potential buyers are still interested in buying a home, which keeps the market competitive but stabilizes over the past two years of scorching activity.”

Despite the jumps, mortgage rates remain well below all-time highs reached over the past 40 years, including the record average rate of 18.63% in October 1981.

Still, the sharpness of current mortgage rate increases combined with soaring borrowing costs will ultimately make consumers more cautious, said Abbey Omodunbi, assistant vice president and chief economist at PNC Financial Services Group.

“I think we’ll probably see further increases in mortgage rates for the rest of the year,” Omodunbi said in an interview with CNN Business. “The Fed wants to see a slowdown in real estate activity.”

The Federal Reserve does not directly set the interest rates that borrowers pay on mortgages, but its actions influence them. Mortgage rates tend to follow 10-year US Treasuries. But rates are indirectly impacted by the Fed’s actions on inflation. When investors see or anticipate rate hikes, they often sell government bonds, driving up yields and, with them, mortgage rates.

At its policymaking meeting last week, the Fed raised its benchmark interest rate by 75 basis points, the largest such increase in three decades. In public comments made since, including testimony before Congress, Fed Chairman Jerome Powell said the central bank’s actions should help dampen demand in the country’s housing market, which has become burning.

Home prices have surged over the past two years, in part due to record mortgage rates, pandemic-related migration patterns, the influence of investment firms buying residential properties, and the buying of mortgage bonds by the Fed.

Rents and house prices continue to rise at double-digit rates in many areas.

“Housing prices should stop rising at such remarkably rapid rates,” Powell said Wednesday during a hearing before the Senate Banking Committee. “Since the start of the pandemic, we have had a very, very hot housing market… across the country. As housing demand moderates…you should see prices stop rising.
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Yet the flip side of higher mortgage rates in an environment of high inflation and record home costs could ultimately prevent millions more Americans from owning a home, according to the State of Housing’s annual report. Harvard University released Wednesday.

A year ago, a buyer who staked 20% on a home with a median price of $390,000 and financed the rest with a 30-year fixed-rate mortgage at an average interest rate of 3.02% had a monthly mortgage payment of $1,673, according to Freddie Mac’s numbers.

At the current rate of 5.81%, the monthly mortgage payment on that same house would be $2,187, a difference of $514.

Housing already appears to be moving into a “new post-pandemic normal,” said George Ratiu, head of economic research at Realtor.com. Rents hit a record high for the 15th month in a row, but the pace of growth is slowing, he said, adding that rising house prices were also down.

“Market prices will continue to adjust to a tight pool of qualified buyers and higher financing costs,” he said in a statement. “The transition from an overheated real estate market to a more sustainable one will take time. The upside is that eventually we should see a healthier environment with more options and better value for many buyers.”

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