Average US mortgage interest rates have reached their highest level in 20 years, posing challenges for homebuyers in a competitive housing market with limited inventory. According to mortgage firm Freddie Mac, the average benchmark rate for 30-year mortgages rose from 6.96% to 7.09% this week, marking the fourth consecutive weekly increase and the highest recorded since April 2002. This rise is attributed to a strong rally in the 10-year Treasury yield, which surpassed 4% and stood at 4.30% on Thursday, its highest level in nearly a year. The persistent rise in rates adds hundreds of dollars to borrowers’ costs and further limits their options in an already unaffordable market for many Americans.
The increase in mortgage rates can be attributed to the strong performance of the US economy, which has exceeded expectations and kept upward pressure on inflation. This gave the Federal Reserve reason to raise its benchmark rate 11 times since March 2022, resulting in the highest federal funds rate in 22 years. Owing to affordability difficulties, stagnant home sales are mainly caused by low inventory. Homeowners who took advantage of historically low borrowing costs two years ago are now reluctant to sell and buy new properties with higher interest rates, exacerbating the shortage of available homes.
The surge in mortgage rates does not necessarily reflect rate increases from the Federal Reserve but rather tracks the yield on 10-year Treasury bonds. Investor expectations about future inflation, global demand for US Treasury bonds, and the Federal Reserve’s actions with interest rates can influence mortgage lending. The average rate on 30-year mortgages is currently over double what it was two years ago when it stood at 2.86%, leading to a decline in home sales and refinances. Additionally, the lack of supply remains a significant factor, contributing to a 23% decline in home sales during the first half of this year.
The rising mortgage rates have created a challenging environment for potential homebuyers, making affordability even more difficult in a competitive housing market with limited inventory.