Mortgage rates are rising again, pushing more buyers out of the housing market

Mortgage rates continue to rise as the Federal Reserve tries to tame unmanageable inflation.

According to Freddie Mac, the 30-year fixed rate mortgage averaged 5.81% for the week ended June 23, up from 5.78% the week before.

Rates averaged 3.02% this time last year, and the last time rates were this high was in the winter of 2008.

“Fixed mortgage rates are up more than two full percentage points since the beginning of the year,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “The combination of rising interest rates and high home prices is likely at the root of the recent declines in existing home sales. In reality, however, many prospective home buyers are still interested in buying a home to keep the market competitive but flattening out the red-hot activity of the last two years.”

Despite the jumps, mortgage rates remain well below the all-time highs of the last 40 years – specifically the record 18.63% set in October 1981.

Still, the sharp rises in current mortgage rates, coupled with rising borrowing costs, will ultimately make consumers more cautious, said Abbey Omodunbi, associate vice president and chief economist at PNC Financial Services Group.

“I think we’re probably going to see another hike in mortgage rates by the end of the year,” Omodunbi said in an interview with CNN Business. “The Fed wants to see a slowdown in housing activity.”

The Federal Reserve doesn’t directly set the interest rates that borrowers pay on mortgages, but its actions affect them. Mortgage interest rates are generally based on 10-year US government bonds. But interest rates are indirectly affected by the Fed’s policy on inflation. When investors see or expect interest rate hikes, they often sell government bonds, which pushes up yields and, in turn, mortgage rates.

During its policy-making meeting last week, the Fed raised interest rates by 75 basis points, the largest such hike in three decades. In public statements made since then, including testifying before Congress, Fed Chair Jerome Powell said the central bank’s actions should help dampen demand in the nation’s housing market, which is running incandescent.

Home prices have risen over the past two years in part due to record-low mortgage rates, pandemic-related migration patterns, the influence of investment firms buying homes, and the Fed’s buying of mortgage bonds.

Rents and home prices continue to rise at double-digit rates in many places.

“Home prices should stop rising at such a remarkable rate,” Powell said in a testimony before the Senate Banking Committee on Wednesday. “Since the pandemic began, we’ve had a very, very hot … housing market across the country. As demand for housing falls… prices should stop rising.”

Still, in an environment of high inflation and record-breaking home prices, the downside of higher mortgage rates could ultimately discourage millions more Americans from owning their own homes, according to Harvard University’s annual housing report released Wednesday.

A year ago, a buyer paying 20% ​​on a home with an average price of $390,000 and financing the rest with a 30-year fixed-rate mortgage at an average interest rate of 3.02% had a monthly mortgage payment of $1,673 Numbers by Freddie Mac.

At today’s interest rate of 5.81%, the monthly mortgage payment for the same house would be $2,187, a difference of $514.

Housing already seems to be transitioning into a “post-pandemic new normal,” said George Ratiu, manager of economic research at Realtor.com. Rents hit a record high for the 15th straight month but the pace of growth is slowing, he said, adding that house price gains are also declining.

“Market prices will continue to adjust to a smaller pool of qualified buyers and higher financing costs,” he said in a statement. “Moving from an overheated real estate market to a more sustainable one will take time. The upside is that ultimately we should see a healthier environment with more options and better value for many buyers.”