U.S. mortgage rates moved higher this week amid signs that the Federal Reserve will continue to hike its trend-setting interest rate.
When the Fed raises its benchmark rate, which it’s done four times this year, the cost to borrow money for homes generally goes up, too.
Yet even though consumers will be paying more to finance a home, they may find solace in other parts of the housing market.
“The silver lining for those still looking for a home is that houses are staying on the market longer, pushing sellers to drop asking prices and leaving room for negotiation,” says George Ratiu, senior economist for Realtor.com.
“As we move into the fall, and the pace of sales slows even further, some buyers may find discounts growing larger, offering opportunities that fit within their budgets.”
30-year fixed-rate mortgages
The average rate on America’s most popular home loan — the 30-year fixed mortgage — rose to 5.66%, up from 5.55% a week ago, housing finance giant Freddie Mac reported on Thursday. A year ago, the typical interest rate on a 30-year mortgage was 2.87%.
“The market’s renewed perception of a more aggressive monetary policy stance has driven mortgage rates up to almost double what they were a year ago,” Sam Khater, Freddie Mac’s chief economist, says.
That perception was renewed last week when Fed Chairman Jerome Powell told a conference of economists that raising the federal funds rate further would be necessary to cool the economy and combat still-high inflation.
“While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said last week at an economic symposium in Jackson Hole, WY.
“These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
15-year fixed-rate mortgages
The interest rate on a 15-year mortgage averaged 4.98% this week, up from 4.85% last week, Freddie Mac says. Last year at this time, the 15-year rate averaged 2.18%.
With rates heading back to their recent summertime highs, typical homebuyers are now paying about 60% more than they did last year on their monthly mortgages, Ratiu says.
Some shoppers are putting their home searches on hold amid the higher rates and uncertainty over the economy. Predictably, home sales are slowing and price increases are moderating.
For the first time in over 17 months, the average home sold for less than its list price in August, according to a report from the Redfin real estate firm.
“There are signs that there is more room for the market to ease,” says Daryl Fairweather, Redfin’s chief economist. “The post-Labor Day slowdown will likely be a little more intense this year than in previous years when the market was super tight.”
“Homebuyers’ budgets are increasingly stretched thin by rising rates and ongoing inflation, so sellers need to make their homes and their prices attractive to get buyers’ attention during this busy time of year.”
5-year adjustable-rate mortgage
The average rate on a five-year adjustable-rate mortgage, or ARM, hit 4.51% this week, up from 4.36% last week.
A year ago, the 15-year rate was averaging 2.43%.
When longer-term mortgage rates go up, some borrowers look to adjustable mortgages, which have lower rates to start.
With a 5/1 ARM, for example, the rate is set for the first five years, and then it adjusts annually, moving up or down in lockstep with the prime rate or another benchmark.
If longer-term rates were to fall after the initial period of an ARM, a borrower could potentially refinance into a lower rate. There’s a risk to that approach, of course, as rates could go higher.
Mortgage applications continue to fall
Last week, mortgage applications fell 3.7% compared to the previous week, the Mortgage Bankers Association (MBA) reported.
“Mortgage rates and Treasury yields rose last week as Federal Reserve officials indicated that short-term rates would stay higher for longer,” says Joel Kan, the MBA’s associate vice president of economic and industry forecasting.
Applications to refinance home loans, which are highly sensitive to rate moves, plunged 8% from the previous week, while loan applications to purchase homes were down 2%, the MBA said.
Refi applications now make up just 30% of all applications. A year ago at this time, they made up more than twice as much.
Where are rates headed?
The 30-year mortgage rate should stay between 5% and 6% over the next few months, says Ratiu, citing high inflation and the Federal Reserve’s tightening policies.
The long-term mortgage rate typically follows the 10-year Treasury yield, which has moved up in recent days.
“Financial markets continue to react to the Federal Reserve’s firm commitment to monetary tightening in order to bring inflation closer to the 2% mark,” Ratiu says.
With rates going higher, the number of buyers is likely to continue getting smaller.
The average American family can no longer afford to purchase a median-priced home when mortgage rates go above 5.7%, says Nadia Evangelou, senior economist with the National Association of Realtors.
At that point, she says, the typical family needs to spend more than 25% of their income on their monthly mortgage payment.
“Adding other expenses such as mortgage insurance, home insurance, taxes and expenses for property maintenance, home buying becomes burdensome for the typical family,” Evangelou says.
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