Mortgage rates experienced a significant increase on Monday due to rising bond yields, driven by investor concerns about the persistence of high interest rates and inflation. The average rate for the popular 30-year fixed mortgage reached 7.48%, marking its highest level since November 2000. This increase of 29 basis points occurred within just one week.
Investors’ expectations for a deterioration in economic data have not been met, according to Matthew Graham, the Chief Operating Officer of Mortgage News Daily. The Federal Reserve is expected to prioritize short-term rates before considering a policy shift, and the current market sentiment has been impacting longer-term rates such as 10-year Treasury yields and mortgage rates.
The rise in mortgage rates presents challenges for potential homebuyers, compounding the effects of elevated home prices caused by the COVID-19 pandemic. Mortgage rates set numerous record lows in 2020, leading to a surge in home buying that drove prices up by more than 40% from the beginning of the pandemic to mid-2022. Although prices briefly dipped at the end of the previous year, they are now increasing once again due to robust demand and limited supply.
The higher mortgage rates exacerbate the supply issue by discouraging current homeowners from listing their homes for sale. Many existing homeowners have rates around or below 3%, making them hesitant to move to a new home and potentially more than double their mortgage rate, creating a phenomenon dubbed “golden handcuffs.”
Comparing affordability to a year ago, potential homebuyers face a significant difference due to the sharp increase in mortgage rates. For instance, the average 30-year fixed rate around this time last year was about 5.5%. This means that for someone buying a $400,000 home with a 20% down payment on a 30-year fixed loan, the monthly payment today would be approximately $420 higher than it would have been a year ago.
In response to higher mortgage rates, more borrowers are opting for adjustable-rate loans with lower interest rates for shorter fixed terms. The share of applications for adjustable-rate mortgages (ARMs) has risen to 7%, a notable increase compared to less than 2% in 2020 when the 30-year fixed rates were at record lows. Homebuilders have been adjusting their strategies by either lowering home prices or offering incentives to offset the impact of higher mortgage rates on potential buyers. The recent drop in homebuilder sentiment in August has been attributed to higher interest rates as a primary factor.