Mortgage Rates Inch Closer to 7% as Homebuyers Feel the Impact
In recent weeks, mortgage rates in the United States have been steadily climbing, inching closer to the 7% mark. According to data from Freddie Mac, the 30-year fixed-rate mortgage averaged 6.90% in the week ending February 22, up from 6.77% the previous week. This is a significant increase compared to a year ago when the average rate was 6.50%. The rise in mortgage rates comes after a period of smaller moves over the past two months, following a high of 7.79% reached in October of last year.
For homebuyers who have been struggling in one of the least affordable markets in decades, the slight decrease in rates over the past few months brought some relief. The average rate hovered near 6.6% for more than a month, making homeownership more affordable. However, as the market processes indications from the Federal Reserve that it will not cut its benchmark rate until later this year, mortgage rates have started trending higher once again.
Sam Khater, Freddie Mac’s chief economist, explains that “strong incoming economic and inflation data has caused the market to re-evaluate the path of monetary policy, leading to higher mortgage rates.” While the Federal Reserve does not directly set the interest rates for mortgages, its actions have a significant influence on them. Mortgage rates tend to track the yield on 10-year US Treasuries, which are affected by anticipation about the Fed’s actions, the actual decisions made by the Fed, and investors’ reactions.
Historically, a strong economy and higher rates did not significantly impact the housing market. However, this time around, Khater believes that the situation is different. He states that “housing affordability is so low that good economic news equates to bad news for homebuyers, who are sensitive to even minor shifts in affordability.” With rates approaching 7%, many potential homebuyers who were expecting rates to cool off this year are now hesitating to make a purchase.
Federal Reserve officials have acknowledged the likelihood of rate cuts in 2024 but are not rushing into any decisions. Jiayi Xu, an economist for Realtor.com, explains that the officials are seeking more concrete evidence of sustained improvement in inflation before making any changes. The release of updated economic projections and Chair Powell’s subsequent discussion of these projections in March may provide more insights into the Fed’s approach. In the meantime, potential homebuyers may be holding back due to uncertainty surrounding mortgage rates.
This time of year typically sees an increase in new listings in housing markets. According to Realtor.com, new listings last week were 9.5% higher than the previous year’s levels. However, this increase in supply does not seem to be translating into new buyers. Mortgage applications dropped by 10.6% in the week ending February 16 compared to the previous week, according to the Mortgage Bankers Association. Jiayi Xu suggests that “the recent increase in mortgage rates has the potential to slow the market by disrupting the plans of many buyers, especially in a market where a significant number of consumers are anticipating lower mortgage rates, not higher.”
As mortgage rates continue to climb, it remains to be seen how this will impact the housing market in the coming months. Homebuyers who were hoping for more affordable rates may need to reassess their plans, while sellers may face a more challenging market as potential buyers hold back. The next meeting of the Federal Open Market Committee in March will provide further insights into the Fed’s approach and its potential impact on mortgage rates.