US mortgage rates exceed 7 percent for the first time in two decades

The key 30-year mortgage rate jumped to 7.08 percent this week, sharply curbing demand even as home prices continued to rise.

The average U.S. long-term mortgage rate topped 7 percent this week for the first time in more than two decades, driven by aggressive rate hikes by the Federal Reserve aimed at curbing inflation not seen in about 40 years.

Mortgage buyer Freddie Mac reported Thursday that the average 30-year rate jumped to 7.08 percent from 6.94 percent last week. The last time the average interest rate was above 7 percent was in April 2002, when the U.S. was still reeling from the Sept. 11 terrorist attacks but six years removed from the 2008 housing market collapse that triggered the Great Depression.

At this time last year, interest rates on a 30-year mortgage averaged 3.14 percent.

“We really see this as a spike in mortgage rates that’s going to have a pretty dramatic impact on market affordability and really severely limit demand,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association.

Many potential home buyers have been sidetracked as mortgage interest rates have more than doubled this year. This trend has knocked the once hot housing market into a slump.

Existing home sales have fallen for eight straight months as borrowing costs have become too high for many Americans who already pay more for food, gas and other essentials. Meanwhile, some homeowners have been putting off putting their homes on the market because they don’t want to jump into a higher interest rate on their next mortgage.

Mortgage rates have risen sharply with the yield on 10-year Treasuries rising amid expectations that the Federal Reserve will continue to raise interest rates in an effort to lower inflation.

The Fed has raised its key rate five times this year, including three consecutive 0.75 percentage point hikes that lifted its short-term lending rate from 3 percent to 3.25 percent, the highest level since 2008. At a meeting in late September, Fed officials predicted they would raise their key rate next year by the beginning to about 4.5 percent.

While mortgage rates don’t necessarily reflect the Fed’s rate hikes, they tend to track the yield on the 10-year Treasury note. This is driven by a number of factors, including investors’ expectations of future inflation and global demand for US Treasuries.

The Fed is expected to raise its key interest rate by another three-quarters when it meets next week. Despite the interest rate increases, inflation has not risen much from the 40-year highs of more than 8 percent at both the consumer and wholesale levels.

The Fed’s interest rate hikes have shown signs of cooling the economy. But the raises have so far appeared to have little effect on the labor market, which remains strong with the unemployment rate at a 50-year low of 3.5 percent and layoffs still at historic lows.

Rising interest rates and rising house prices

Higher mortgage rates are reducing the purchasing power of home buyers, resulting in fewer people being able to afford a home as home prices continue to rise, albeit at a slower pace than earlier this year.

A combination of higher interest rates and home prices means the typical home buyer’s mortgage payment is hundreds of dollars higher than earlier this year.

The monthly payment for an average-priced apartment is now 78 percent higher than a year ago for a buyer who can pay a 20 percent down payment. According to Realtor.com, this represents a $1,000 increase in the typical home payment in the last year alone.

To survive, some homebuyers opt for adjustable-rate mortgages, which don’t make it easier to get financing, but offer lower monthly payments during the first few years of the loan term.

Such loans became less attractive in the last couple of years as average interest rates on long-term mortgages fell to all-time lows. But in August, they accounted for about 20 percent of mortgages, CoreLogic chief economist Selma Hepp said.

“It speaks to the decline in purchasing power that consumers are having to contend with due to higher mortgage rates,” he said.