Mortgage Rates Hit 8 Percent, Crushing Loan Demand

A construction worker carries materials as he works on a home under construction at a housing development in Petaluma, Calif., on March 23, 2022. Justin Sullivan/Getty Images

Mortgage rates hit 8 percent on Oct. 18, hammering affordability for homebuyers and sending loan demand plummeting to a 28-year low.

The average rate for a benchmark 30-year mortgage climbed to 8 percent on Oct. 18, according to Mortgage News Daily, which uses data from multiple lenders from across the country to determine the current average loan rate on a daily basis. The rate is the highest in 23 years.

Although the outlet provided the data without commentary, mortgage finance firm Freddie Mac said last week—when it announced that rates had risen to 7.57 percent—that the upward moves in loan rates were driven by market gyrations and geopolitical turbulence. Freddie Mac normally releases mortgage rate updates on a weekly basis.

“For the fifth consecutive week, mortgage rates rose as ongoing market and geopolitical uncertainty continues to increase,” Sam Khater, Freddie Mac’s chief economist, said in a statement on Oct. 12.

Mr. Khater’s remarks came as consumers have been under growing pressure, increasingly relying on their savings to pay for shopping, while the share of Americans reporting that high prices are eroding their living standards has climbed to an all-time high.

The outbreak of the Israel–Hamas war has added another layer of uncertainty, sending oil prices higher and prompting JPMorgan CEO Jamie Dimon to warn that the “most dangerous time” that the world has seen in decades has arrived.

While warning of clouds on the horizon of consumer spending, “extremely” high government debt levels, and the largest peacetime fiscal deficits in U.S. history, Mr. Dimon said in a statement last week that he sees a growing risk that inflation stays high and that the Federal Reserve will raise interest rates even higher.

Faced with decades-high inflation, the U.S. central bank embarked on a rapid interest rate hiking cycle, going from near zero in March 2022 to within the current range of 5.25–5.5 percent. And Fed officials have warned that more hikes could be in store because inflation remains stubbornly high.

In his statement, Mr. Dimon touched on the disruptive effects of the war in Ukraine and the recent terror attacks in Israel, warning of “far-reaching impacts on energy and food markets, global trade, and geopolitical relationships.”

“This may be the most dangerous time the world has seen in decades,” he said.

Mortgage Demand at 28-Year Low

With rates now rising to 8 percent, the mortgage demand slump has deepened despite an underlying demand for affordable housing.

The Mortgage Bankers Association (MBA) said on Oct. 18 that mortgage application demand has plunged for the sixth consecutive week, to the lowest level since 1995.

“Both purchase and refinance applications declined, driven by larger drops for conventional applications,” Joel Kan, MBA’s deputy chief economist, said.

“Purchase applications were 21 percent lower than the same week last year, as homebuying activity continues to pull back given reduced purchasing power from higher rates and the ongoing lack of available inventory.”

Mortgage rates were around 3 percent just two years ago. Initially, they rose on the back of the Fed’s rate hikes, but more recently they’ve been pushed higher by bond market activity.

The yield on the benchmark 10-year Treasury note, which is heavily influential in setting mortgage rates, has climbed above 4.9 percent to the highest level since July 2007.

Borrowing costs look unlikely to retreat in the near term, unless a sudden directional shift takes place in bond markets.

“For the first time in 23 years, 8% mortgage rates are officially back,” analysts at The Kobeissi Letter wrote in a post on X, formerly known as Twitter.

“Less than 3 years ago, the average rate on a 30-year mortgage was just 2.6%. The median monthly payment for homebuyers will cross $3,000 this month.

“We are paying the price for ‘free’ money after $4 trillion of stimulus in years of zero-rate policy. This is far from over.”

No One Wants to Sell, No One Wants to Buy

A man walks along a street in a neighborhood of single family homes in Los Angeles on July 30, 2021. Frederic J. Brown/AFP via Getty Images

Economists polled by Reuters expect that the data due on Oct. 19 from the National Association of Realtors will show that sales of previously owned houses in September fell for a fourth straight month—the slowest sales rate since 2010.

With home loan borrowing costs at multi-decade highs and many potential home sellers having locked in their mortgages at much lower rates, there are dual disincentives pushing down sales volumes.

“No one wants to sell their property, no one wants to buy a property,” Glenn Kelman, CEO of housing data provider Redfin, told Yahoo Finance in an interview. “So sales volume is going to stay low for the foreseeable future.”

Several housing-industry lobby groups have urged Federal Reserve Chair Jerome Powell not to raise interest rates any further—and to refrain from selling mortgage bonds until real estate financing becomes more stable.

“We urge the Fed to take these simple steps to ensure that this sector does not precipitate the hard landing the Fed has tried so hard to avoid,” the National Association of Realtors, Mortgage Bankers Association, and National Association of Home Builders wrote in a letter to Mr. Powell on Oct. 9.

The latest government data on inflation show that the Consumer Price Index rose by 3.7 percent in September, matching August’s pace.

Although that’s down from a recent peak of 9.1 percent in June 2022 and lower than the 8.2 percent pace a year ago, it’s still well above the Fed’s inflation target of 2 percent.