Mortgage rates drop 7% for the first time in two decades

The average long-term US mortgage rate stood above 7% this week for the first time in more than two decades, a result of aggressive rate hikes from the Federal Reserve, aimed at curbing inflation not seen in some 40 years.

Mortgage buyer Freddie Mac reported Thursday that the prime 30-year rate average rose to 7.08% from 6.94% last week. The last time the average rate was above 7% was in April 2002, a time when the US was still reeling from the September 11 terrorist attacks, but was six years away from the 2008 housing market collapse that triggered the Great Recession.

Other measures push up the cost of borrowing for a home loan even more. The Mortgage Bankers Association said Wednesday that the rate on a traditional 30-year mortgage rose to 7.16% this week, At this time last year, rates on 30-year mortgages averaged 3.14%.

“Inflation persists, with consumers seeing higher costs at every turn, leading to a further decline in consumer confidence this month,” Sam Khatter, chief economist at Freddie Mac’s, said in a statement. “In fact, many potential homebuyers want to wait and see where the housing market will end up, pushing demand and home prices further downward.”

Fed has increased prime benchmark lending rate Five times this year, including three consecutive 0.75 percentage point increases, has brought down its prime short-term lending rate to a range of 3% to 3.25%, the highest level since 2008. At its last meeting in late September, Fed officials estimated they would raise their key rate to around 4.5% by early next year.

Mortgage rates don’t necessarily reflect the Fed’s rate hikes, but they tend to track the yield on a 10-year Treasury note. It is influenced by a variety of factors, including investor expectations for future inflation and global demand for US Treasuries.

30-year fixed-rate mortgage average hits highest level since 2001


Many potential homebuyers have gone over the edge as mortgage rates more than doubled this year. Sales of existing homes have declined for eight months in a row as borrowing costs become too much of a barrier for many Americans to already pay more for food, gas and other necessities.

Higher rates translate into very real costs for home buyers. Take a home that sells for the US average price of $384,800 and that is purchased with a 20% down payment. At the current mortgage rate of 7.16%, a homebuyer would pay about $750 more per month than a loan at 3.2%, the rate due in early 2022.

In the meantime, some homeowners have put off putting their homes on the market because they don’t want to jump to a higher rate on their next mortgage.

Home prices expected to fall

According to Freddie Mac, housing prices rose about 40% during the pandemic. But next year the picture is likely to be different.

“As labor markets cool, housing demand will remain weak in 2023, potentially leading to a fall in prices next year,” the lender said in a recent report. “However, home price forecast uncertainty remains widespread due to interest rate volatility and the potential for a recession on the horizon.”

The Fed is expected to raise its benchmark rate by another three-quarters when it meets next week. Despite the rate hike, inflation at both the consumer and wholesale levels has rarely risen above 40-year highs of 8%.

The Fed rate hike has shown some signs of cooling the economy. But the rate hike has so far had little impact on the job market, which remains strong with the unemployment rate matching a 50-year low of 3.5% and layoffs still historically low.

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