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Mortgage rates climb to 7.31%, highest since 2000

Mortgage rates climb to 7.31%, highest since 2000

 

Mortgage rates climbed to the highest level in nearly 23 years, ramping up the pressure on potential homebuyers.

The average for a 30-year, fixed loan rose for a third week, reaching 7.31%, up from 7.19% last week, Freddie Mac said in a statement Thursday. A year ago, the 30-year fixed-rate was 6.7%. The latest time rates were higher was December 2000.

Mortgage rates have topped 7% for the past seven weeks, hurting affordability for buyers and cooling purchases. The survey rate – for borrowers who put 20% down and have excellent credit – translates to a buyer with a $600,000 mortgage would be paying $4,118 a month at this week’s average rate, 58% more than in early 2022, before the Federal Reserve started hiking its benchmark rate to cool an overheated economy.

“Mortgage rates now at their highest level in more than two decades continued to climb this week as investors adjusted their expectations about the strength and resilience of the US economy,” said Orphe Divounguy, senior macroeconomist at Zillow Home Loans. “However, the impacts of tighter credit conditions, rising oil prices, student loan repayments and the risk of a prolonged government shutdown are all expected to cool the labor market further and temper economic activity in the coming months.”

House-hunting fallout

Pricey mortgages have trimmed homebuying.

Contracts to buy previously owned homes are off 19% from August 2022, according to National Association of Realtors. The steep drop in pending sales in August, on the heels of reports of slower existing and new home sales at the end of the summer, suggests that the market is cooling, said Lisa Sturtevant, chief economist at Bright Multiple Listing Service.

Total home sales this year could be below 4.2 million; that would be the lowest level since 2010, Sturtevant says.

Purchaser’s buying power was crushed, and for many the math for buying a home just did not work.

“Buyers are hitting affordability ceilings, causing some of them to sit out the market,” said Sturtevant. “;For others, the higher mortgage rates and general economic uncertainty are simply making them more cautious. Either way, expect the number of home sales transactions this fall to be at a decade low.”

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To date, rising rates have not significantly dulled home prices. And in 2000, when rates were last this high, home prices rose by 6% that year – and 60% through 2007, according to the FHFA indexes.

Tight inventory of homes to buy pushed home values to a record high in July, according to data released this week by S&P CoreLogic Case-Shiller. But price growth may have its limits. For the four weeks ending Sept. 24, sellers dropped prices on roughly one in 15 homes for sale, the highest level since November, according to Redfin Corp.

However, buying a starter home is now more expensive than renting in all but three of the 50 top metro areas in the US, according to a Realtor.com study. That “explains why buyer demand is likely to remain relatively low,” Realtor.com’s Chief Economist Danielle Hale said in a statement.

Why the rise?

In 2000, rates were high as the Fed tried to cool an economy overheated by a red-hot technology industry and its “dot-com’ stocks.

In 2023, mortgage rates spiked due to the Fed’s historic inflation-curbing campaign. It’s made progress since June 2022, when inflation hit 9.1%. But central bankers say there is still a ways to go.

The Fed’s preferred inflation measure, the core Personal Consumption Expenditures index, is currently 4.2%, which is more than double the Fed&#’;s target of 2%. Economists expect it to drop to 3.9% when the latest reading is released on Friday.

Bloomberg, CNN and the Southern California News Group’s Jonathan Lansner contributed to this report.

This week’s mortgage rate surge is inline with “higher-for-longer” thinking about interest rates following the latest Fed policy meeting, said Hale.

“Revised economic projections show that another rate hike this year is definitely on the table, and the expected policy rate in 2024 and 2025 was also higher than previously forecast,” Hale said.

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 actions and economic activity. The yield on 10-year Treasuries rose from 4.6% on Wednesday vs. 4.3% a week earlier.