The high mortgage rates have significantly impacted home sales, which have been in a slump for the last two years
This week saw an increase in the average rate on a 30-year mortgage, marking the first rise in home loan borrowing costs since late May.
The rate climbed to 6.95% from 6.86% last week, according to mortgage buyer Freddie Mac’s announcement on Wednesday. A year ago, the rate averaged 6.81%. This increase comes after a four-week decrease in the average rate, which has mostly remained around 7% this year.
Rising rates can add hundreds of dollars a month to borrowers’ costs. The high mortgage rates have significantly impacted home sales, which have been in a slump since 2022. Borrowing costs on 15-year fixed-rate mortgages, popular among homeowners refinancing their home loans, also increased this week, pushing the average rate to 6.25% from 6.16% last week. A year ago, it averaged 6.24%, said Freddie Mac.
Mortgage rates are influenced by several factors, including the bond market’s reaction to the Federal Reserve’s interest rate policy and the movements in the 10-year Treasury yield, which lenders use as a guide for pricing home loans. The yield, which peaked at 4.7% in late April, has generally been declining since then, fuelled by hopes that inflation is slowing enough for the Fed to lower its main interest rate from the highest level in over two decades.
Fed officials have indicated that inflation has moved closer to the Fed’s target level of 2% in recent months and hinted that they expect to cut the central bank’s benchmark rate once this year. But until the Fed starts to slash its short-term rate, don’t expect long-term mortgage rates to shift from their current position.
Most number crunchers reckon the Fed will make its initial rate reduction in September, with a possible further cut before the year is out. However, mortgage rates might start to soften in the next few weeks if bond yields dip in anticipation of the Fed’s move, according to Lisa Sturtevant, chief economist at Bright MLS.
“While today’s report is not what homebuyers were hoping for, we may actually start to see rates fall sooner than expected,” she commented. During the pandemic, mortgage rates plummeted to record lows, sparking a buying bonanza that drove property prices through the roof. From 2019 to 2023, the median national sales price for previously owned US homes surged by over 43%.
And even with a downturn in sales this year, May saw home prices reach a new peak of $419,300. Sky-high borrowing costs and unprecedented home prices have put off many potential buyers this spring, which is usually the peak season for the property market.
The number of previously owned US homes changing hands dropped in May for the third consecutive month, and early signs suggest June followed suit. Looking ahead, most economists forecast that the average rate on a 30-year mortgage will stay north of 6% throughout this year. That’s a stark contrast to just three years ago when the average rate was half that amount.
“We are still expecting rates to moderately decrease in the second half of the year and given additional inventory, price growth should temper, boding well for interested homebuyers,” stated Sam Khater, Freddie Mac’s chief economist.
