Mortgage rates top 7% as inflation fight resumes

U.S. mortgage rates rose this week, after the Federal Reserve reengaged in its war on inflation. The average rate on 30-year mortgages climbed to 7.09% this week, up from 6.98% last week, according to Bankrate’s weekly national survey of large lenders.

After taking a break from inflation fighting last month, the Fed resumed rate increases when it met last week. The central bank announced a widely anticipated quarter-point increase in interest rates.

While the Fed doesn’t directly set fixed mortgage rates, it does set the tone — and as the central bank has boosted its policy rate from zero in early 2022 to 5.25% now, mortgage rates have risen sharply. “This is the most aggressive raising of interest rates in 40 years,” said Lawrence Yun, chief economist at the National Association of Realtors.

Mortgage rates remain chained to inflation, a metric the Fed has been moving to control. Meanwhile, the most relevant benchmark is the 10-year Treasury yield, which topped 4% on Wednesday — its highest level of 2023.

“Further disinflation in the coming months should help support more, albeit modest, downward movements in Treasury yields, which mortgage rates tend to follow,” says Orphe Divounguy, senior economist at Zillow.

Mortgage rates rose steeply for most of 2022, topping 7% in November before retreating. They’re at that level again.

As for other loans:

>> The 15-year fixed-rate mortgage was 6.54%, up from 6.44% last week.

>> The 5/6 adjustable-rate mortgage stood at 7.09%, up from 7.02% to a week ago.

>> The 30-year fixed-rate jumbo mortgage was 6.95%, up from 6.88% last week.

Home affordability

The national median family income for 2023 is $96,300, according to the U.S. Department of Housing and Urban Development, and the median price of an existing home sold in June 2023 was $410,200, according to the National Association of Realtors. Based on a 20% down payment and a mortgage rate of 7.09%, the monthly payment of $2,203 amounts to 27% of the typical family’s monthly income.

A year ago, median family income was $90,000, the median home price was $413,800 and the average mortgage rate was 5.55%. Buying the typical home then required 25% of a family’s monthly income.

The sharp rise in mortgage rates has squeezed affordability and sparked a slowdown in home sales. First-time buyers are especially challenged by this market. However, home prices haven’t fallen significantly — and values are unlikely to decline, given the shortage of homes for sale, housing economists say. “Buyers can expect to continue seeing mortgage rates above 6%, although with 11 months of rates in that range, many home shoppers have adjusted their budgets to the new reality,” says George Ratiu, chief economist at Keeping Current Matters, a real estate marketing company. Many housing economists are hopeful that mortgage rates will fall later this year as inflation comes under control. “If we see mortgage rates trend down, consistent with inflation returning to target levels, it should remove substantial friction from real estate markets,” says Ruben Gonzalez, chief economist at real estate brokerage Keller Williams. Where rates are headed Experts expected to see rates decrease by the end of 2023 as the Fed’s round of rate hikes draws to an end, but the resilience of the U.S. economy has thrown a wrinkle into those expectations. The job market remains strong, and the U.S. economy has yet to fall into recession.

“We do expect mortgage rates to trend down once the (Fed) clearly signals that they have reached the peak for this cycle, as the reduction in uncertainty with respect to the direction of rates should narrow the spread of mortgage rates relative to Treasury benchmarks,” says Mike Frattantoni, chief economist at the Mortgage Bankers Association.

“Low inflation means low mortgage rates,” Yun says. “Therefore, decelerating consumer prices could steadily lift home sales and increase home production in a few months.”