Mortgage rates are climbing based on expectations that the Federal Reserve won’t cut interest rates anytime soon.
Washington CNN —
Mortgage rates soared this week, breaching the key 7% threshold and extending America’s housing affordability crisis.
The 30-year fixed-rate mortgage averaged 7.10% in the week ending April 18, up from 6.88% the previous week, according to Freddie Mac data released Thursday. A year ago, the average 30-year fixed-rate was 6.39%.
Breaching 7% represents a psychological threshold that hadn’t yet been crossed this year and adds to pressures buffeting the US housing market during the crucial spring homebuying season.
Mortgage rates are climbing based on expectations that the Federal Reserve won’t cut interest rates anytime soon. The Fed doesn’t directly set mortgage rates, but its actions do influence them, and persistently hot inflation readings are keeping the Fed on hold.
“As rates trend higher, potential homebuyers are deciding whether to buy before rates rise even more or hold off in hopes of decreases later in the year,” said Sam Khater, Freddie Mac’s chief economist, in a statement.
In a separate report, the National Association of Realtors reported that US home sales declined sharply in March in a sign that homebuyers are waiting on the sidelines as they contend with a tough housing market.
Americans might not get much of a break this year
Fed officials have already signaled they expect fewer rate cuts this year than they previously thought, based on recent economic data showing that progress on inflation has stalled. Some economists have floated the possibility that the Fed might not cut rates this year at all — and a couple of central bank officials have even mentioned the possibility of another rate hike.
That has sent bond yields soaring. Mortgage rates track the benchmark 10-year US Treasury yield, which has risen to its highest level since November at 4.637%. The Consumer Price Index for March came in hotter than expected, weighing on the stock market and also prompting forecasters to push back their estimates for the first rate cut.
If inflation stalls further, or even worsens, mortgage rates could climb higher.
“Homebuying is such a major decision that people have the calculator in front of them. So if it’s 7.01% then it’ll be an emotional shock, but nonetheless I think they’re going to plant a number into the calculator and see whether their monthly payment is manageable or not,” NAR chief economist Lawrence Yun said on a call with reporters Thursday.
Home buyers are being stymied not just by high mortgage rates, but also by elevated home prices nationwide.
The median price of an existing home was $393,500 last month, NAR reported Thursday, an increase of 4.8% from a year earlier. That was the highest March price on record. February prices also reached a record high. Today’s housing market is tough by many measures, but Americans are also enjoying one of the strongest job markets in history.
A persistent undersupply of housing
A lack of inventory has been a longstanding issue for America’s housing market.
That has slowly improved in recent months, rising 4.7% in March from the prior month and up 14.4% last month year-over-year, according to NAR data. But housing supply overall still isn’t keeping up with demand, which is weighing on affordability.
“We need more inventory, definitely, for the health of the market,” Yun said.
Homeowners who locked in a low mortgage rate before the Fed began to hike rates in 2022 have largely preferred to not sell their homes. Yun has said previously that life changes such as marriage, divorce and new children could eventually force those homeowners to just give up on waiting for mortgage rates to fall and sell their homes.
At the current pace of sales, it would take 3.2 months to exhaust the current level of homes on the market, up from 2.9 months in February and 2.7 months in March 2023.
Uncertainty over NAR settlement
There is also lingering uncertainty over the historic NAR settlement that was announced in March and is expected to change how homebuyers and sellers pay their real estate agents. It hasn’t been approved by the courts yet, but it is already changing the behavior of home shoppers and sellers — even before new rules take effect in July.
Yun said first-time buyers trickled back into the market last month “because people heard about the lawsuit settlement where the buyers possibly need to come up with extra funds to pay for professional representation, but they want to do it before the new rules take place.”
Prospective homebuyers have told CNN they’re hopeful that the settlement will mean lower homes prices, offsetting the pain of elevated mortgage rates, but many Realtors say there are many unknowns.
“This is unchartered territory,” Debra Dobbs, a Realtor in Chicago, told CNN previously of the potential new rules.
This story has been updated with additional developments and context.
