The American housing market is witnessing a dramatic shift as mortgage rates continue to soar, hitting a staggering 7.2% in August, the highest recorded since 2001, according to fresh data released by Freddie Mac. This escalation, a sharp rise from the 7.09% recorded the previous week and a significant leap from the 5.5% average this time last year, is exerting immense pressure on homebuyers, shrinking their purchasing power and leading to a decline in existing home sales.

The Federal Reserve’s relentless efforts to curb inflation through interest rate hikes have inadvertently propelled the yield on the 10-year treasury bond, a critical benchmark for pricing an average 30-year loan. This has resulted in the mortgage rates climbing even higher, experts say. With the last time the 30-year fixed-rate mortgage exceeding 7% being in November 2022, the current rising trend has led to a 4% decrease in mortgage applications and a 28-year low in purchase activity, as reported by the Mortgage Bankers Association for the week ending August 18.

Mortgage Rates Highest Since 2001, Impacting Homebuyers’ Purchasing Power

Soaring Mortgage Rates

Homebuyers’ purchasing power continues to dwindle as mortgage rates persistently rise. As of the week ending in August, rates averaged at 7.2%, the highest since 2001, as per data from Freddie Mac. A significant leap from the previous week’s average of 7.09%, this upward trend is a stark contrast to the 5.5% seen a year ago. Freddie Mac’s Chief Economist, Sam Khater, suggests that indications of continued economic strength will likely maintain this upward pressure on rates in the short term.

Falling Home Sales

Simultaneously, the supply of unsold homes remains distressingly low, causing a notable decline in existing home sales. Mortgage applications have decreased by 4% from the previous week, with purchase activity falling to a 28-year low, according to the Mortgage Bankers Association data for the week ending Aug.18. This fall in home purchase applications is largely due to the increasing rate environment and the reduction in purchasing power, as stated by Joel Kan, MBA’s Vice President and Deputy Chief Economist.

Federal Reserve’s Role

The Federal Reserve’s interest rate hikes to combat inflation have led to an increase in the yield on the 10-year treasury bond. This yield is a benchmark for pricing an average 30-year loan, which has, in turn, contributing to the climbing mortgage rates. The last time the 30-year fixed-rate mortgage exceeded 7% was in November 2022.

Current Mortgage Rates

According to Bankrate.com, the average 30-year fixed mortgage interest rate was 7.53% on Thursday. For homeowners looking to refinance, the national average interest rate for a 30-year fixed refinance is 7.80%, with the 15-year fixed refinance interest rate average at 6.9%.

New Home Sales on the Rise

In contrast to the fall in existing home sales, new home sales have seen an increase. Data from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau shows that sales of newly built, single-family homes in July rose 4.4% to a 714,000 seasonally adjusted annual rate. This rate is a significant 31.5% increase from a year ago.

Takeaways

While the climbing mortgage rates present a challenge for homebuyers, it’s worth noting the rise in new home sales. Builders offering to buy down mortgage rates by as much as 1 – 1.5 points could save buyers a significant amount of money. Other incentives such as closing cost credits and upgrades could also make new homes more attractive to buyers. Therefore, despite the current high mortgage rates, there may still be opportunities for prospective homebuyers.