Mortgage rates are now the highest they have been in more than two decades, thanks to the Federal Reserve's efforts to counteract the historic bout of inflation, hurting affordability and threatening the market.
As of Thursday, the average rate on a 30-year fixed-rate mortgage was 7.09%, more than double the average before the Fed started raising interest rates, according to Freddie Mac. Mortgage rates are now higher than their peak in November when they topped out at 7.08%. The last time rates were this high was March 2002, according to the Freddie Mac data.
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The average rate on a 15-year, fixed-rate mortgage is now clocking in at 6.46%.
In a note, Bankrate analyst Jeff Ostrowski pointed out that the last time mortgage rates were this high, Amazon was merely a startup company, Enron still dominated the energy sector, and now-legendary quarterback Tom Brady had yet to win a Super Bowl.
“The new reality has jolted the housing market: Home sales have fallen sharply since 2021, and homeowners, reluctant to give up their super-low mortgage rates, are staying put. Housing affordability has emerged as a persistent challenge,” Ostrowski said.
The Fed has been raising interest rates since March 2022 and has hiked its rate target (which is a different, very short-term rate) from near-zero all the way to 5.25% to 5.50%, the highest it has been since the dot-com bubble.
Mortgage rates roughly move in tandem with the Fed’s rate target — when the central bank raises its target, mortgages get more expensive and vice versa.
The housing market is in a bit of a strange position right now, though, because mortgage rates were so low for so long during the pandemic.
While many characterized the housing market as being in a recession last year — and home prices even fell for a bit — recent data show that the situation is a bit more complicated. Housing prices have started rising again as people refuse to sell their existing homes because they are locked into the ultra-low pandemic bargain rates.
That has caused some inventory issues with existing homes and pushed up demand for new homes. The scarcity has also had the effect of maintaining strength in the construction sector, which hasn’t seen any massive loss of jobs as would be typical when the Fed is so quickly raising rates to drive down demand.
The number of housing starts, which measures the change in the number of new residential buildings that began construction, ticked up in July, showing that the market is still craving new construction.
Housing starts rose 3.9% from June to this past month, according to a Wednesday report from the Census Bureau. They are at a seasonally adjusted annual rate of 1.452 million. From July 2022, they rose 5.9%.
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Still, after steadily rising for seven consecutive months, builder confidence fell in August, according to the National Association of Home Builders/Wells Fargo Housing Market Index.
“But while this latest confidence reading is a reminder that housing affordability is an ongoing challenge, demand for new construction continues to be supported by a lack of resale inventory, as many homeowners elect to stay put because they are locked in at a low mortgage rate,” said NAHB Chairwoman Alicia Huey, a custom homebuilder and developer from Alabama.