This week, US mortgage rates are inching ever closer to the 7% mark. This rise is closely tied to recent actions like the Federal Reserve’s rate hike from the previous week, along with a recent downgrade by Fitch Ratings of US sovereign debt and key institutions like Freddie Mac and Fannie Mae.
The data, which emerged from Freddie Mac on Thursday, reveals that the 30-year fixed-rate mortgage averaged at 6.90% for the week ending on August 3, marking an increase from the 6.81% of the preceding week. To provide some perspective, just a year back, the rate was at 4.99%, which was the most competitive rate in the previous 12 months.
Sam Khater, the chief economist at Freddie Mac, highlighted that the combination of positive economic reports and the credit rating downgrade of the US government are the primary factors behind the upswing in mortgage rates. He noted, “Even with the increasing rates and a decrease in purchase demands, the rise in home prices remains undeterred due to the considerably low unsold inventory.”
The rates in discussion are deduced from the multitude of mortgage applications Freddie Mac receives from a myriad of lenders nationwide. It’s worth noting that the data encompasses only borrowers who put down a 20% deposit and have an impeccable credit history.
Economic Indicators and Their Impacts
Hannah Jones, an economic data analyst at Realtor.com, mentioned that the fixed rate for a 30-year mortgage is pushing towards the 7% margin, especially with the 10-year Treasury yields surpassing the 4% mark. Recent moves by the US Treasury to offload more than $100 billion in long-term securities, she said, has pushed the 10-year Treasury yields to peak levels not seen since the previous November.
With the impending release of data on employment and inflation, these figures will play a significant role in influencing the trajectory of mortgage rates in the immediate future.
In relation to last week’s developments, the Fed had elevated its benchmark lending rate, as was widely anticipated. Hannah Jones elaborated that any future rate adjustments would largely depend on incoming economic data. She remarked, “Current homebuyers are beginning to feel the squeeze of the tighter policies, which, in turn, keeps mortgage rates at their current levels.”
Although the Fed isn’t directly responsible for setting mortgage interest rates, their strategies have a notable influence. Typically, mortgage rates mirror the yield trends of 10-year US Treasuries. These yields fluctuate based on speculations regarding the Fed’s next moves, the Fed’s actual decisions, and the subsequent reactions of investors.
Tight Inventory Affects Affordability
Home inventories remain at a minimal level, posing significant challenges for affordability. June witnessed a dip in both existing home sales and newly constructed home sales, as rising rates kept inventory levels subdued and consequently, home prices surged.
Jones pointed out the continuing issues: “Despite the high home prices and increased mortgage rates eroding many buyers’ purchasing capacity, we’ve observed reduced home sales and listings.” She added that the contemporary housing market is struggling to reconcile the extremely limited inventory with the sustained yet relatively low demand from buyers.
As per Realtor.com’s reports, there was a consistent drop in active inventory throughout July when compared to the same month in the previous year. Jones attributed this to homeowners’ hesitancy to list their properties in the wake of the current high mortgage rates. This reluctance from homeowners was met with the usual seasonal spike in demand from potential buyers, regardless of the affordability challenges.
Jones also emphasized the decrease in homeowner vacancy, which reached an all-time low of 0.7% in Q2 of 2023. The main reasons? Many homeowners decided against moving, and eager buyers quickly snatched up the available inventory.
In her closing remarks, Jones stated, “The housing market is grappling with over ten years of underconstruction. This pre-existing deficiency in housing supply is now further intensified by the decreasing number of existing homes available for purchase.”
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