Average long-term U.S. mortgage rates reached nearly 7% this week, marking the highest level since November. This surge in rates is adding to the challenges faced by homebuyers in an already difficult housing market characterized by a shortage of available homes for sale.
As per Freddie Mac, a mortgage buyer, the average rate on the 30-year fixed-rate mortgage increased to 6.96% from 6.81% the previous week. In comparison, the rate stood at 5.51% in 2022. This rise represents the third consecutive week of increasing rates, pushing the average rate to its highest point since early November when it peaked at 7.08%. The higher rates are placing additional financial burdens on borrowers, limiting their affordability in a market that is already unaffordable for many Americans.
The recent upward movement in the 10-year Treasury yield has contributed to the increase in mortgage rates. The yield surpassed 4% last week for the first time since March, affecting the pricing of rates on mortgages and other loans. However, the yield has slightly decreased to 3.80% following new data indicating lower inflation, which has led bond traders to reduce their expectations of future rate hikes by the Federal Reserve.
Data released by the U.S. government on July 12 showed that consumer-level inflation rose by 3% in June compared to the previous year, the lowest point since early 2021. Although inflation remains above the Federal Reserve's target of 2%, the incoming data suggests a softening of inflation. Freddie Mac's chief economist, Sam Khater, noted that while inflation is decreasing, housing costs, which contribute significantly to inflation, remain stubbornly high due to limited inventory relative to demand.
The Federal Reserve has been raising interest rates rapidly in response to high inflation. Since its first hike in March 2022, the central bank has increased its benchmark interest rate to around 5.1%, the highest level in 16 years. However, at its most recent meeting, policymakers chose not to raise rates further. It is important to note that mortgage rates do not directly mirror the Fed's rate increases but tend to follow the yield on the 10-year Treasury note. Expectations for future inflation, global demand for U.S. Treasurys, and the actions of the Federal Reserve can all influence home loan rates.
Compared to two years ago, the average rate on a 30-year mortgage has more than doubled. The ultra-low rates from that period stimulated a surge in home sales and refinancing. The current significantly higher rates are discouraging homeowners who locked in lower borrowing costs two years ago from selling their properties. This scarcity of available homes on the market has contributed to the slow pace of home sales this year. In June, sales of previously owned U.S. homes declined by 20.4% compared to the previous year, marking ten consecutive months of annual declines of 20% or more, as reported by the National Association of Realtors.
The average rate on 15-year fixed-rate mortgages, which are popular among those refinancing their homes, also rose this week. It increased to 6.30% from 6.24% the previous week. A year ago, the average rate for 15-year mortgages stood at 4.67%, Freddie Mac claims.
As mortgage rates continue to climb, potential homebuyers may face greater challenges in affordability, exacerbating the ongoing housing market constraints caused by limited inventory.
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