Trouble Brewing in US Housing Market as Mortgage Rates Hit 20-Year Highs

A home is offered for sale by owner in Chicago, Ill., on Jan. 20, 2022. Scott Olson/Getty Images

Mortgage rates hit their highest levels in 20 years this week with the 30-year fixed-rate mortgage averaging near 6.92 percent—up from 6.66 percent the week prior, according to Freddie Mac’s Primary Mortgage Market Survey.

It’s the highest average rate since April 2002. The 30-year fixed rate stood at about 3.05 percent one year ago.

“We continue to see a tale of two economies in the data,” Sam Khater, Freddie Mac’s chief economist, said in a report. “Strong job and wage growth are keeping consumers’ balance sheets positive, while lingering inflation, recession fears, and housing affordability are driving housing demand down precipitously.”

The report said the 15-year fixed-rate mortgage averaged about 6.09 percent, up from 5.90 percent a week ago. A year ago around this time, the 15-year rate averaged 2.30 percent, Freddie Mac stated.

And the five-year Treasury-indexed hybrid adjustable-rate mortgage, or ARM, averaged 5.81 percent, up from last week when it averaged 5.36 percent. The five-year ARM averaged 2.55 percent last year at this time, according to Freddie Mac.

It comes as homebuyer demand remains at a 22-year low, according to a Mortgage Bankers Association survey for the week ending Oct. 7. It decreased 2 percent from a week prior, and that is down 39 percent from a year ago.

“Application volumes for both refinancing and home purchases declined and continue to fall further behind last year’s record levels. The news that job growth and wage growth continued in September is positive for the housing market, as higher incomes support housing demand. However, it also pushed off the possibility of any near-term pivot from the Federal Reserve on its plans for additional rate hikes,” said Mike Fratantoni, the organization’s chief economist.

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Realtor.com says that the monthly mortgage payment for a home with a median price of $427,000 with a 20 percent down payment stands at $2,254—up 75 percent from the same week in October 2021.

“Homebuyers are very aware that interest rates have gone up,” Adriana Perezchica, the head of Via Real Estate in Washington state, told Yahoo Money about the market situation. “The first question they ask is what their monthly payment will look like.”

While the Federal Reserve’s efforts to curb high inflation by raising interest rates are having a significant impact on the mortgage market, inflation is still higher than expected. Data released by the Department of Labor Thursday shows the Consumer Price Index was up 8.2 percent year-over-year in September.

Because inflation is still high, the Fed will likely again raise rates during the next Federal Open Market Committee between Oct. 29 and 30.

“The consequences are evident in rent growth and high home prices,” Lawrence Yun, chief economist for the National Association of Realtors, told CNN. “Even with an anticipated fall in home prices in some markets—principally in California—homes will continue to be unaffordable, while rents are squeezing non-owners.”

Yun added even with an economic recession on the horizon, the Fed is unlikely to let up and will raise interest rates.

“The 10-year Treasury yield broke past 4 percent this morning, and mortgage rates will be fighting to hold at a 7 percent average rate in the upcoming weeks,” said Yun.