US mortgage rates jumped this week, climbing closer to 7%. The move follows last week’s rate hike from the Federal Reserve, and the downgrade this week by Fitch Ratings agency of US sovereign debt, and of Freddie Mac and Fannie Mae.
The 30-year fixed-rate mortgage averaged 6.90% in the week ending on August 3, up from 6.81% the week before, according to data from Freddie Mac released Thursday. A year ago, the 30-year fixed-rate was 4.99%, the lowest rates have been in the last 12 months.
“The combination of upbeat economic data and the U.S. government credit rating downgrade caused mortgage rates to rise this week,” said Sam Khater, Freddie Mac’s chief economist. “Despite higher rates and lower purchase demand, home prices have increased due to very low unsold inventory.”
The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit.
The fixed rate for a 30-year mortgage continued to close in on 7% this week as 10-year Treasury yields climbed past the 4% threshold, said Hannah Jones, economic data analyst at Realtor.com.
“On Wednesday, the US Treasury announced it would sell off more than $100 billion of long-term securities, driving 10-year Treasury yields to the highest level since November,” said Jones. “This development, along with upcoming employment and inflation data, will determine how much mortgage rates may rise in the short term.”
Should employment and inflation pick up steam, she said, mortgage rates are likely to continue climbing as markets anticipate further monetary tightening.
Last week, the Fed raised its benchmark lending rate by a quarter point, as expected.
“The committee’s statement emphasized that incoming economic data will guide future rate hike choices,” Jones said. “Home buyers continue to feel the effects of tighter policy, which keeps a floor under mortgage rates.”
While the Fed does not set the interest rates that borrowers pay on mortgages directly, its actions influence them. Mortgage rates tend to track the yield on 10-year US Treasuries, which move based on a combination of anticipation about the Fed’s actions, what the Fed actually does and investors’ reactions. When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.
Home inventory remains tight, further hampering affordability. Existing home sales and sales of newly constructed homes were down in June as higher rates have been keeping inventory low and prices higher.
“Still-high home prices and elevated mortgage rates have eaten into purchasing power for many buyers, leading to both fewer home sales and fewer listings,” said Jones. “Today’s housing market is grappling with low for-sale inventory amid sustained, though historically low, buyer demand.”
Active inventory fell compared to the previous year each week in July, according to Realtor.com. Many homeowners held off on listing their home for sale, largely in response to today’s high mortgage rates, Jones said.
“The drop in for-sale inventory was met with the typical seasonal pickup in buyer demand, despite affordability constraints, which propped up home prices,” she said.
Homeowner vacancy fell to a historical low of 0.7% in the second quarter of 2023, Jones said, as many homeowners stayed put and home shoppers snapped up available inventory, leaving fewer homes vacant.
“The housing market continues to face more than a decade of underbuilding, and the resulting gap in home supply is being exacerbated by the lower level of existing homes for sale,” she said.
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