Mortgage rates reach 20-year high, further increase anticipated.
The Cost of Financing a Home Surges to Highest Level Since 2000, Diminishing Affordability for Homebuyers
The average long-term U.S. mortgage rate has skyrocketed this week, reaching its highest point since December 2000. This surge in rates further dampens the affordability outlook for many potential homebuyers.
The benchmark 30-year home loan now stands at 7.49%, up from 7.31% last week, according to mortgage buyer Freddie Mac. A year ago, the rate averaged 6.66%.
Not only have rates increased for 30-year mortgages, but borrowing costs for 15-year fixed-rate mortgages have also risen. The average rate for these loans climbed to 6.78% from 6.72% last week. A year ago, it was 5.90%.
These high rates can significantly raise monthly costs for borrowers, limiting their purchasing power in an already unaffordable housing market. Additionally, homeowners who locked in low rates two years ago are discouraged from selling.
The average rate on a 30-year mortgage is now more than double what it was two years ago, when it was just 2.99%.
The combination of elevated rates and low home inventory has worsened the affordability crisis, keeping home prices near all-time highs despite a 21% decline in sales of previously occupied U.S. homes during the first eight months of this year compared to the same period in 2022.
Furthermore, home loan applications have plummeted to their lowest level since 1995, while the median monthly payment listed on these applications has risen by 18% to $2,170 in August compared to the previous year.
Factors Contributing to High Mortgage Rates
Sam Khater, Freddie Mac’s chief economist, attributes the highest mortgage rates in a generation to several factors, including shifts in inflation, the job market, and uncertainty surrounding the Federal Reserve’s next move. These factors have led to a decline in homebuyer demand.
This marks the fourth consecutive week of rising mortgage rates, with the weekly average rate on a 30-year mortgage remaining above 7% since mid-August. The current rate is the highest since December 8, 2000, when it averaged 7.54%.
Mortgage rates have been climbing alongside the 10-year Treasury yield, which serves as a guide for loan pricing. Concerns about the Federal Reserve’s intention to maintain high interest rates for an extended period to combat inflation have caused the yield to surge in recent weeks.
The threat of higher rates for a longer duration has pushed Treasury yields to levels not seen in over a decade. Although the yield on the 10-year Treasury has eased back from its recent peak, it remains significantly higher than in previous years.
While mortgage rates do not directly mirror the Fed’s rate increases, they tend to follow the yield on the 10-year Treasury note. Expectations for future inflation, global demand for U.S. Treasurys, and the Fed’s interest rate decisions can all influence home loan rates.
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The post Mortgage Rates Hit Highest Level Since 2000, with More Climbing Still Expected appeared first on The Western Journal.
What are the factors contributing to the surge in mortgage rates?
Chief economist, attributes the surge in mortgage rates to a combination of factors. Firstly, there has been an increase in inflationary pressures, driven by rising energy and labor costs, as well as supply chain disruptions. This has led to expectations of higher interest rates by the Federal Reserve in an effort to curb inflation.
Additionally, the Federal Reserve has started to taper its bond-buying program, which has been keeping long-term interest rates artificially low. As the central bank reduces its purchases of mortgage-backed securities, it puts upward pressure on mortgage rates.
Furthermore, the ongoing global pandemic and its economic impact have created uncertainty in the market. Investors are cautious and seeking safer investments, which has led to increased demand for U.S. Treasury bonds. As the demand for bonds rises, their yields decrease, pushing mortgage rates higher.
The combination of these factors has resulted in a significant increase in mortgage rates, reaching levels not seen in over two decades. This surge in financing costs has significant implications for homebuyers, particularly those already struggling with high home prices and low inventory.
Impact on Homebuyers
The rise in mortgage rates diminishes affordability for homebuyers. Higher interest rates translate to higher monthly mortgage payments, reducing the purchasing power of potential buyers. This can make homeownership out of reach for many individuals and families, especially with soaring home prices in many parts of the country.
Furthermore, existing homeowners who locked in low mortgage rates in recent years are discouraged from selling and moving to a new property. The increase in financing costs makes it less attractive to give up a low-rate mortgage and take on a new loan with higher interest rates, further constraining the housing market inventory.
Implications for the Housing Market
The combination of high mortgage rates and low inventory has exacerbated the affordability crisis in the housing market. Despite a decline in home sales, home prices have remained near all-time highs. The limited supply of homes, coupled with high demand, has allowed sellers to maintain high asking prices despite the economic challenges brought on by the pandemic.
Additionally, the stagnant housing inventory, combined with rising mortgage rates, has deterred potential buyers from entering the market. Home loan applications have reached their lowest level in decades, pointing to a shrinking pool of qualified buyers. This slowdown in demand could potentially lead to a further slowdown in the housing market, impacting not only homebuyers but also the broader economy.
Conclusion
The surge in mortgage rates to their highest level since 2000 has created challenges for homebuyers, diminishing affordability and reducing purchasing power. Factors such as inflationary pressures, the Federal Reserve’s tapering of bond purchases, and the ongoing pandemic have all contributed to this increase in financing costs. The combination of high rates and low housing inventory has worsened the affordability crisis, keeping home prices near all-time highs. As a result, the housing market is facing declining home loan applications and a decline in sales of previously occupied homes. The impact of these high mortgage rates on the housing market and the broader economy remains to be seen, but it is clear that the cost of financing a home is a significant concern for prospective buyers.
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