Mortgage rates advance toward 8%

Mortgage rates continued to climb last week amid a stronger-than-expected economy and geopolitical uncertainty in the Middle East.

The 30-year fixed-rate mortgage averaged 7.63% in the week ending October 19, up from 7.57% the week before, according to data from Freddie Mac released Thursday. A year ago, the 30-year fixed-rate was 6.94%.

“Mortgage rates continued to approach 8% this week, further impacting affordability,” said Sam Khater, Freddie Mac’s chief economist, in a statement.

The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit. A current buyer’s rate may be different.

Not only are homebuyers feeling the impact of rising rates, but home builders are as well, Khater said.

“Construction of new homes rebounded in September but as rates keep rising, home builders appear to be losing confidence,” he said. “As a result, we expect construction to trend down in the short-term.”

That will further hurt inventory levels, and the low inventory of homes to buy is one of the main reasons prices are staying as high as they are right now.

Mortgage rates have spiked during the Federal Reserve’s historic inflation-curbing campaign — and while a good deal of progress has been made since June 2022, when inflation hit 9.1%, Fed officials say there is still a ways to go.

The Fed’s preferred inflation measure, the core Personal Consumption Expenditures index, is currently 3.9%, which is nearly double the Fed’s target of 2%. But it is the lowest annual increase that index has seen in two years and is seen as a positive step toward the Fed’s target. The next rate-setting meeting by the Federal Reserve will be October 31 and November 1.

Rates this week averaged higher as investors reacted to hotter-than-expected retail sales data and a stronger-than-expected labor market in September.

“While under typical circumstances, such positive data would be a reason for cheer among investors and businesses,” said Jiayi Xu, economist at Realtor.com, “it has now raised concerns regarding the inflation outlook and the likelihood of further Federal Reserve interest rate hikes, which increase the possibility of mortgage rates hitting 8% in the coming months.”

The 10-year Treasury yield surpassed 4.9% on Wednesday, for the first time since 2007.

Mortgage rates tend to track the yield on 10-year US Treasuries, which move based on a combination of anticipation about the Fed’s actions, what the Fed actually does and investors’ reactions. When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow. While the Fed does not set the interest rates that borrowers pay on mortgages directly, its actions influence them.

With the summer selling season over and mortgage rates near 8%, fewer homeowners are expected to list their home as the rest of the year winds down. They are unwilling to trade their ultra low rate of 2%, 3%, or 4% for rates sometimes more than twice as high.

This hampers first time buyers looking for entry-level homes that existing homeowners are holding on to.

In September 2023, the active inventory for entry-level homes, ranging in size from 750 to 1750 square feet, was down 6.5% year-over-year and was 34.1% lower than four years ago, before the pandemic, according to Realtor.com.

“The 20-year high mortgage rates have exacerbated the affordability struggles faced by first-time homebuyers who lack the advantage of near-record high home equity to leverage,” said Jiayi Xu, an economist at Realtor.com, in a statement.

The lack of home equity typically makes it harder for first-time home buyers, but especially so with elevated rates. Particularly right now, it is critical that borrowers ask their lender about down payment assistance programs, which can make the difference between becoming a homeowner and not for many buyers.

Freddie Mac recently launched a down payment assistance tool to help homebuyers identify and take advantage of down payment assistance programs nationwide.