Mortgage rates in the United States have experienced a significant jump due to an increase in bond yields. Investors are concerned that high interest rates and inflation will persist for a longer period than initially expected. The average rate for a 30-year fixed mortgage has reached 7.48%, the highest level since November 2000. In just one week, rates have risen by 29 basis points.
Investors were anticipating more negative economic data, which would have prompted a policy shift by the Federal Reserve. However, the data has not deteriorated as expected, leading to longer-term rates, such as 10-year Treasury yields and mortgages, bearing the brunt of the negative sentiment in the market. This situation is unlikely to change until the data forces the Fed to consider a rate cut.
These higher rates are having a significant impact on potential homebuyers, compounding the issue of inflated home prices caused by the pandemic. In 2020, rates hit record lows, sparking a buying frenzy and driving prices up by over 40% from the start of the pandemic to the summer of 2022. Although prices dipped slightly at the end of last year, they are now rising again due to strong demand and limited supply.
The higher mortgage rates are further exacerbating the supply issue. Many current homeowners are unwilling to list their homes for sale as they have rates around or below 3%. Moving to a new home would mean more than doubling their current rate, creating what has been termed "golden handcuffs" for potential sellers.
The affordability difference for buyers compared to a year ago is significant. Last year, the average rate for a 30-year fixed mortgage was around 5.5%. For someone purchasing a $400,000 home with a 20% down payment on a 30-year fixed loan, the monthly payment today, including principal and interest, is approximately $420 higher than it would have been a year ago.
As a result of the rising rates, more borrowers are opting for adjustable rate loans, which offer lower interest rates for shorter fixed terms. The average rate for a 5-year adjustable rate mortgage (ARM) last week was 6.2%, according to the Mortgage Bankers Association. The share of ARM applications has risen to 7%, compared to less than 2% in 2020 when the 30-year fixed rate was at record lows.
To counter the impact of higher mortgage rates, homebuilders have been attempting to offset them by either buying down rates for short or long terms, or by reducing home prices. These incentives were reduced earlier this year when demand surged and rates fell, but they have been increased once again. However, homebuilder sentiment in August plummeted, with builders citing higher interest rates as the main reason for the decline.