US Mortgage Rates Hit Nearly 3-Year High, Adding to Housing Market Woes

The average long-term U.S. mortgage rate has climbed to its highest point in nearly three years, reaching 7.28% this week. This represents a significant jump from 7.03% the previous week and is the largest weekly increase in several years, according to mortgage buyer Freddie Mac. The current rate is the highest observed since November 22, 2023, when it stood at 7.29%.

Borrowing costs for 15-year fixed-rate mortgages, a popular option for those refinancing, also saw an increase, moving to 6.60% from 6.42% last week. A year ago, this rate was 5.55%.

These rising mortgage rates can significantly increase monthly payments for borrowers, potentially adding hundreds of dollars to housing costs and diminishing purchasing power. Consequently, higher rates may prompt prospective homebuyers to postpone their purchasing decisions.

Since late February, when the average rate for a 30-year mortgage briefly fell to 5.98%, its lowest point since late 2022, rates have increased by approximately one percentage point. This rise translates to an estimated additional monthly cost of $276 for a borrower financing a $400,000 home loan at the current average rate.

Mortgage rates are influenced by several factors, including inflation, Federal Reserve policy, and the expectations of bond market investors regarding the economy. They tend to follow the trajectory of the 10-year Treasury yield, which lenders use as a benchmark for pricing home loans. Expectations of higher inflation, exacerbated by surging oil prices, have driven up the 10-year Treasury yield from 3.97% in late February to 5.27% on Thursday. This marks a return to levels not seen since 2007.

Elevated borrowing costs can slow the broader economy by making it more expensive for individuals and businesses to obtain loans. The U.S. housing market has been experiencing a slump since 2022, when mortgage rates began their ascent from pandemic-era lows. Sales of previously occupied homes remained largely stagnant last year, hitting a 30-year low. In August, existing home sales fell 2% from July to a seasonally adjusted annual rate of 3.98 million units, the slowest pace in over a year.

Reflecting this trend, mortgage applications, which include purchases and refinances, dropped 6% last week from the prior week, according to the Mortgage Bankers Association. This marks the fourth consecutive weekly decline. Applications for refinancing existing mortgages also decreased.

In response to higher fixed-rate mortgages, an increasing number of potential homebuyers are turning to adjustable-rate mortgages (ARMs). These loans, which typically offer lower initial interest rates, accounted for more than 10% of all mortgage applications last week, according to the MBA.