The average long-term U.S. mortgage rate increased this week to its highest level since December 2000, driving up the cost of purchasing a home and further lowering the affordability prospects for many prospective homebuyers.
According to mortgage buyer Freddie Mac, the average rate on the standard 30-year home loan increased to 7.49% from 7.31% last week. The rate was on average 6.66% a year ago.
The cost of borrowing on 15-year fixed-rate mortgages, which are popular among homeowners refinancing their mortgage, has also gone up. The rate increased from 6.72% last week to 6.78% on average. According to Freddie Mac, the average was 5.90% a year ago.
High interest rates can increase monthly expenses for borrowers by hundreds of dollars, which limits how much they can afford in a market that is already out of reach for many Americans. Additionally, they deter homeowners from selling who two years earlier secured rock-bottom rates. Two years ago, when the average rate on a 30-year mortgage was only 2.99%, it was more than twice as high.
The affordability crisis has been made worse by the combination of high interest rates and a lack of available homes, which has kept housing prices close to all-time highs even as sales of previously inhabited U.S. homes have decreased 21% through the first eight months of this year compared to the same period in 2022.
Last week, the number of mortgage loan applications dropped to its lowest level since 1995, according to the Mortgage Bankers Association. In parallel, the median monthly payment reported on applications for mortgages has been increasing. It increased 18% from a year earlier to $2,170 in August.
“Several factors, including shifts in inflation, the job market, and uncertainty around the Federal Reserve’s next move, are contributing to the highest mortgage rates in a generation,” said Sam Khater, chief economist at Freddie Mac. Unsurprisingly, this is reducing demand from homebuyers.
Rates on mortgages have increased for the fourth week in a row. Since mid-August, the 30-year mortgage’s weekly average rate has been above 7%; it is currently at its highest point since Dec. 8, 2000, when it averaged 7.54%.
Mortgage rates have been rising alongside the yield on the 10-year Treasury note, which lenders use to determine how much to charge for loans. The yield has increased recently due to concerns that the Federal Reserve will likely maintain its key interest rate at a high level for an extended period of time in an effort to reduce inflation.
In an effort to combat excessive inflation, the central bank has already raised its main interest rate to its highest level since 2001.
Treasury yields have reached levels not seen in more than ten years as a result of the prospect of higher rates lasting longer. The yield on the 10-year Treasury increased to 4.80% on Tuesday, the highest level since 2007. Since then, it has eased back, and as of Thursday’s lunchtime trading, it was at 4.71%. It was only 0.50% at the beginning of the epidemic, and it was about 3.50% in May.
As the 10-year Treasury yield hits 5%, an 8% mortgage rate does not seem unlikely, according to Lisa Sturtevant, chief economist at Bright MLS. “The difference between the yield on the 10-year Treasury and the rate on a 30-year fixed rate mortgage has historically been around 3 percentage points,” she said.
Mortgage rates often follow the yield on the 10-year Treasury note, albeit they don’t always reflect Fed rate increases. Mortgage interest rates can be affected by investor expectations for future inflation, the demand for U.S. Treasury securities abroad, and the Fed’s interest rate decisions.