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As a subscriber you can listen to articles at work, in the car, or while you work out. Subscribe NowThe average long-term U.S. mortgage rate topped 7% for the first time in more than two decades this week, a result of the Federal Reserve’s aggressive rate hikes intended to tame inflation not seen in some 40 years.
Mortgage buyer Freddie Mac reported Thursday that the average on the key 30-year rate jumped to 7.08% from 6.94% last week. The last time the average rate was above 7% was April 2002, a time when the U.S. was still reeling from the Sept. 11 terrorist attacks, but six years away from the 2008 housing market collapse that triggered the Great Recession.
Last year at this time, rates on a 30-year mortgage averaged 3.14%.
The Fed has raised its key benchmark lending rate five times this year, including three consecutive 0.75 percentage point increases that have brought its key short-term borrowing rate to a range of 3% to 3.25%, the highest level since 2008. At their last meeting in late September, Fed officials projected that by early next year they would raise their key rate to roughly 4.5%.
Mortgage rates don’t necessarily mirror the Fed’s rate increases, but tend to track the yield on the 10-year Treasury note. That’s influenced by a variety of factors, including investors’ expectations for future inflation and global demand for U.S. Treasurys.
Many potential homebuyers have moved to the sidelines as mortgage rates have more than doubled this year. Sales of existing homes have declined for eight straight months as borrowing costs have become too high a hurdle for many Americans already paying more for food, gas and other necessities. Meanwhile, some homeowners have held off putting their homes on the market because they don’t want to jump into a higher rate on their next mortgage.
The Fed is expected to raise its benchmark rate another three-quarters of a point when it meets next week. Despite the rate increases, inflation has hardly budged from 40-year highs, above 8% at both the consumer and wholesale level.
The Fed rate increases have shown some signs of cooling the economy. But the rate increases have seemed to have little effect on the job market yet, which remains strong with the unemployment rate matching a 50-year low of 3.5% and layoffs still historically low.
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The sky is not falling for those who aspire to move to a new address. Now is actually a good time to buy a new or existing home. As rates go up, housing prices are coming down. A qualified buyer can get a short-term loan to make the purchase, confident that in a year or two rates will be lower and property values will be higher. With more equity they will be able to re-finance to a lower rate.
Brent, not really true.
To your first point: The increase in interest costs is much higher than the savings you might get from lower home process. Home prices haven’t dropped much. It mostly depends on how much of a down payment you can. For example, if you buy a $300,000 home and can only afford to put 20% down ($60,000) you finance the other 80% ($240,000). The monthly payment for $240,000 on a 7% fixed 30-year is $1,597. At the start of 2022, the rate was 3.0%. That payment would be $1,012, or $585/mo less. If you want to hold the monthly payment fixed at $1,012 at 7%, then you can only borrow $152,000. For simplicity, we’ll assume pyou still put $60,000 down. That means you can only afford a home worth $60,000 + $152,000 = $212,000. Homes have not declined *anywhere near* that much >> $300,000 vs $212,000 = almost 30% decrease.
Now, if you can afford to put 50%-75% down, then you are less impacted by an increase in the relatively smaller amount of the purchase price that you are financing.
To your second point: “…confident that in a year or two rates will be lower and property values will be higher.” That’s not a good guess. Rates are not likely to be lower in a year or two, or certainly not a lot lower. Maybe they’ll come down to 5.5% or 6.0%. That won’t budge the needle much on the calculations above. And not sure anyone should be banking on housing prices increasing much from here.
We haven’t seen nothing yet. Wait until they get as high as they were in October of 1980 of 13.74%. but yet people still bought houses then
They actually got in the 16-18% range in the mid 80’s depending on down payment and credit score. The truth is that we are all spoiled rotten for having such low rates for such a long period of time. If one were to look back over the last 40 years or so the average 30 yr fixed rate would be in the vicinity of 7%. There is still demand for housing and there will continue to be for some time. Hopefully inflation will subside eventually and we can get back to more normal times. People who have discipline and live within their means will weather the storm just fine.