Mortgage rates keep climbing, dampening homebuyer demand: Freddie Mac

Mortgage rates climbed north of 7% and buyers face a real possibility that they may continue rising as long as economic indicators remain resilient, according to Freddie Mac.

The average 30-year fixed-rate mortgage increased to 7.149% for the week ending Oct. 5, according to Freddie Mac's latest Primary Mortgage Market Survey. That's an increase from the previous week when it averaged 7.31%. A year ago, the 30-year fixed-rate mortgage averaged 6.66%. 

The average rate for a 15-year mortgage was 6.78%, up from 6.72% last week and up from 5.9% last year.

Most buyers are well versed on how higher interest rates have pushed mortgage rates up. They also follow loosely the yield on the 10-year Treasury, which reached a new high of 4.80% this week in response to the continued interest rate hike, according to Realtor.com. The Fed has raised interest rates 11 times since last year, which has triggered a significant jump in mortgage rates, pushing them to their highest level in over two decades. 

"Mortgage rates maintained their upward trajectory as the 10-year Treasury yield, a key benchmark, climbed," Freddie Mac's Chief Economist Sam Khater said. "Several factors, including shifts in inflation, the job market and uncertainty around the Federal Reserve's next move, are contributing to the highest mortgage rates in a generation. Unsurprisingly, this is pulling back homebuyer demand."

If you're ready to shop around for a mortgage loan, you can use the Credible marketplace to help you quickly compare interest rates from multiple mortgage lenders and get prequalified in minutes.

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What the Fed does next will rely heavily on upcoming economic reports, particularly the September jobs report, according to Realtor.com Economist Jiayi Xu. At the September meeting, the Fed projected a 3.8% unemployment rate for 2023, down from 4.1% in June.

"In light of the Federal Reserve's indication of a 'tighter for longer' monetary policy, we anticipate that mortgage rates will persist above the 7% threshold for an extended period," Xu said. 

"Chairman [Jerome] Powell had previously emphasized that the robust labor market plays a pivotal role in the Fed's interest rate decisions due to its potential to drive wage growth and consequently keep inflation elevated," Xu said.

Higher mortgage rates have eroded affordability for most buyers. A typical monthly mortgage payment for buyers reached $1,896 in August, or 18% higher than a year prior, a recent Zillow report said. Altogether, the monthly principal and interest to buy a typical home has increased 122% in the past three years. 

The higher rate environment means existing homeowners are less likely to put their homes on the market, even as home prices rise. They want to avoid borrowing at today's much higher rates, sometimes double their existing cost of funds. This has prevented housing supply from building and is why home prices continue to rise in conjunction with mortgage rates. More than 60% of homebuyers have encountered challenges related to inventory, struggling to find homes that align with their budget or meet their specific needs, according to Xu.

Homebuyers can still find the best mortgage rate by shopping around and comparing your options. Visit Credible to compare rates from different lenders without affecting your credit score. 

EXTREME WEATHER IMPACTING HOW BUYERS SHOP FOR HOMES: ZILLOW

Homebuyers still in the market compete over the limited inventory, evidenced by increasing home listing prices and quick sales. But as inventory builds, that could soon turn as more supply enters the market, shifting the balance of negotiating power from sellers to buyers, according to Zillow.

"Since July 2022, the flow of new listings trended almost continuously toward ever deeper seasonal lows," Zillow said. "But this August saw an unusual month-over-month increase in new listings, which slashed the year-over-year deficit roughly in half from its July gap. It's too soon to declare the worst of the new listings drought behind us, but it is an extra point for supply in the supply-and-demand equation that determines the push-pull dynamics of the market."

Still, home prices remain high. In August, prices were 42% higher compared with March 2020, when the pandemic began, according to a recent CoreLogic report. U.S. home prices (including distressed sales) increased by 3.7% year over year in August 2023 compared with August 2022. Home prices rose by 0.3% on a month-over-month basis compared with July 2023. To put it into perspective, homebuyers in August paid a median sales price of $375,000.

"While continued mortgage rate increases challenge affordability across U.S. housing markets, home price growth is in line with typical seasonal averages, reflecting strong demand bolstered by a healthy labor market, strong wage growth and supporting demographic trends," CoreLogic Chief Economist Selma Hepp said. "Still, with a slower buying season ahead and the surging cost of homeownership, additional monthly price gains may taper off."

Shopping for the best deal in a high mortgage rate environment can bring savings. If you're trying to find the best mortgage rate, using the Credible marketplace to compare options from different lenders can help you compare your options at once without affecting your credit score.

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