The average interest rate for a 30-year fixed mortgage in the United States increased to 6.32% this week, slightly higher than last week’s 6.27%. This rise in borrowing costs comes at a time when homebuyers are already dealing with a challenging housing market characterized by limited inventory and high property prices, as reported by the Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac.
Experts point out that key improvements in the U.S. economy, particularly declining inflation and increasing job opportunities, may help to mitigate short-term economic uncertainty. Freddie Mac’s chief economist, Sam Khater, emphasized that the recent increase in mortgage rates is not necessarily a reflection of the underlying health of the economy. “We should remember that the rise in rates is largely due to shifts in expectations and not the underlying economy, which has been strong for most of the year. Although higher rates make affordability more challenging, it shows the economic strength that should continue to support the recovery of the housing market.”
Mortgage rates are influenced by several factors, with a significant one being the bond market’s reaction to the Federal Reserve’s adjustments to interest rates. In particular, the 10-year Treasury yield, a key benchmark for lenders in setting mortgage rates, plays a vital role. As of Thursday, the 10-year Treasury yield had risen to 4.1%, a noticeable increase from 3.62% in mid-September. This jump occurred around the time the Federal Reserve reduced its benchmark lending rate by 0.5 percentage points.
Since March 2022, the Federal Reserve has raised interest rates seven times in an effort to control inflation. These rate hikes have led to increased borrowing costs across various types of loans, including mortgages. The resulting “lock-in effect” has made it harder for existing homeowners to sell or refinance their homes because many fear they won’t be able to secure a new mortgage with a more favorable interest rate. This effect is contributing to the already tight supply of homes on the market.
The real mortgage landscape
In the current market, high borrowing costs are exacerbating affordability challenges. Potential homebuyers are not only contending with higher mortgage rates but also facing historically high property prices and a scarcity of available homes. Despite a slight cooling in the market, home prices have remained relatively high. According to the National Association of Realtors (NAR), the national median sales price of homes increased by 3.1% over the past year, reaching $416,700 in the most recent month. However, while prices have risen, home sales have dropped by over 4%, reflecting the ongoing strain on affordability.
Although mortgage rates have risen recently, they remain below the peak of 7.22% seen in May 2024. In fact, since July, mortgage rates had been gradually declining as markets anticipated the Federal Reserve’s decision to lower its main interest rate in September for the first time in more than four years. This decision offered some relief to prospective homebuyers, but the recent increase in rates highlights the persistent volatility that has characterized the housing market over the last few years.
Taylor Marr, deputy chief economist at real estate brokerage Redfin, described the situation as a “double-edged sword” for the housing market. “High mortgage rates are a double-edged sword for the housing market. They’re cutting demand because they make it less affordable to buy, but they’re also keeping inventory low because current homeowners don’t want to give up their low mortgage rates.” This dynamic is creating a difficult environment for both buyers and sellers, as affordability continues to be a primary concern, and the limited inventory only adds to the challenge.
There is some hope for relief on the horizon. Officials from the Federal Reserve have indicated plans to make additional, gradual cuts to interest rates over the next few years. These rate reductions could potentially begin later this year and continue through 2025 and 2026. If implemented, these cuts are expected to gradually lower borrowing costs, making home purchases more affordable for buyers and potentially helping to stabilize the housing market.
