Mortgage rates rise to just short of 7%

By Anna Bahney, CNN

Washington, DC (CNN) — US mortgage rates rose for the third week in a row but stayed just under the 7% threshold.

The 30-year fixed-rate mortgage averaged 6.96% in the week ending August 10, up from 6.90% the week before, according to data from Freddie Mac released Thursday. A year ago, the 30-year fixed-rate was 5.22%.

Elevated mortgage rates in the wake of the Federal Reserve’s historic rate-hiking campaign have taken home affordability to its lowest level in several decades. Buying a home is more expensive because of the added cost of financing the mortgage, and homeowners who previously locked in lower rates are reluctant to sell. The combination of low inventory and high costs has squeezed would-be homebuyers.

Rates have been above 6.5% since the end of May, and this week’s average rate matches the highest level since November.

“There is no doubt continued high rates will prolong affordability challenges longer than expected,” said Sam Khater, Freddie Mac’s chief economist. “However, upward pressure on rates is the product of a resilient economy with low unemployment and strong wage growth, which historically has kept purchase demand solid.”

The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit.

All eyes on employment and inflation data

The rate stayed elevated this week after the Federal Reserve highlighted its reliance on jobs and inflation data in its July monetary policy meeting and in recent comments.

Markets had been waiting for July’s inflation report, released Thursday morning. That report showed inflation rose in July to 3.2% annually, compared to a 3% annual increase in June. That was the first time inflation picked up in a year. The data also showed that shelter costs contributed 90% of the total increase in inflation last month.

“July’s Consumer Price Index holds significant importance for the Fed’s upcoming decisions,” said Jiayi Xu, an economist at Realtor.com.

That faster pace of price increases could support the Fed’s concern that the battle is not over, Xu said. The Fed also will consider the forthcoming August employment and inflation data prior to the next policy meeting, in September.

In addition, the most recent jobs report offered some mixed signals about the labor market, Xu said, including a smaller number of net new jobs added and a dipping unemployment rate.

“While July’s jobs report itself is very unlikely to have a direct impact on the Fed’s upcoming decision, the decline to a 3.5% unemployment rate may imply that more significant slowing is needed to align with the Fed’s projected year-end rate of 4.1%,” she said.

Affordability challenges remain

Borrowing costs will remain elevated until financial markets see an “all clear” signal from the Federal Reserve, accompanied by a stop in interest rate hikes, said George Ratiu, chief economist at Keeping Current Matters, a real estate market insights and content company.

While the Fed does not set the interest rates that borrowers pay on mortgages directly, its actions influence them. Mortgage rates tend to track the yield on 10-year US Treasuries, which move based on a combination of anticipation about the Fed’s actions, what the Fed actually does and investors’ reactions. When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.

Currently mortgage rates are running higher than they should be in relation to the 10-Year Treasury, given historical trends, he said. The spread between the 30-year fixed rate mortgage and the 10-year Treasury hovers around 300 basis points, Ratiu pointed out, a level seen only a handful of times in the past 50 years and mostly during periods of high inflation and economic turbulence.

“In the absence of the elevated risk premium and hewing closer to a historical average of 172 basis points, today’s 30-year fixed mortgage rate would be around 5.7%,” Ratiu said.

Homebuyers remain sensitive to elevated interest rates, with applications for mortgage rates dropping last week, according to the Mortgage Bankers Association.

“Due to these higher rates, there was a significant pullback in mortgage application activity,” said Bob Broeksmit, MBA president and CEO. “Both prospective buyers and sellers are feeling the squeeze of higher rates as well as low housing inventory, which has prompted a pronounced slowdown in activity this summer.”

While real estate markets are benefiting from more people gaining jobs and better paychecks this year, sales of existing homes have been lagging, said Ratiu.

“The challenge comes mainly from too many buyers chasing not enough available properties,” he said.

Looking to history as a guide, Ratiu said mortgage rates tend to start cooling once inflation abates, with a six-to-eight-month lag.

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