Canada Markets closed

Once ‘unthinkable,’ mortgage rates over 7% are now imminent — here’s what homebuyers are doing to cope

Once ‘unthinkable,’ mortgage rates over 7% are now imminent — here’s what homebuyers are doing to cope
Once ‘unthinkable,’ mortgage rates over 7% are now imminent — here’s what homebuyers are doing to cope

U.S. mortgage rates are up for the sixth straight week, crushing home sales as borrowing costs near their 20-year high.

The average rate on America’s most popular home loan — the 30-year fixed mortgage — is up more than one full percentage point since the beginning of September.

That means the monthly payment of a buyer financing a median-priced home is now $250 higher than it was just 30 days ago, says Nadia Evangelou, senior economist with the National Association of Realtors (NAR).

Don't miss

30-year fixed-rate mortgages

The average rate on a 30-year fixed mortgage reached 6.7% this week, up from 6.29% one week ago, mortgage finance giant Freddie Mac reported on Thursday.

Last year at this time, the rate was averaging 3.01%.

The surge in mortgage rates is another stressful sign for homebuyers dealing with a shaky U.S. economy. The Federal Reserve raised its trend-setting rate for the fifth time in September, prescribing one more bitter pill to ease the pain of inflation.

“Investors are concerned about the likelihood of an economic recession due to the Federal Reserve’s push to crush inflation through monetary tightening,” says George Ratiu, senior economist of Realtor.com.

At the same time, mortgage rates tend to more directly follow the 10-year Treasury yield — which crossed above 4% this week for the first time since 2008.

15-year fixed-rate mortgages

The average rate on a 15-year mortgage is 5.96%, up from 5.44% a week ago, Freddie Mac says. A year ago at this time, the 15-year rate was 2.28%.

Seeing numbers like these, home shoppers are choosing en masse to halt their plans to buy. Sales of existing homes are expected to plummet 15.2% this year, and new home sales will collapse by 20.9%, according to estimates from NAR.

Yet home prices, which have been bolstered by limited supply, will still rise by 9.6% in 2022, predicts Lawrence Yun, NAR’s chief economist. Next year, he says, the median home price is expected to increase by just 1.2% and sales will fall by 7.1%.

“The direction of mortgage rates — upward or downward — is the prime mover for home buying, and decade-high rates have deeply cut into contract signings," Yun says.

“If mortgage rates moderate and the economy continues adding jobs, then home buying should also stabilize."

Read more: Do you fall in America's lower, middle, or upper class? How your income stacks up

5-year adjustable-rate mortgage

The average rate on a five-year adjustable mortgage, or ARM, is averaging 5.3%, up from 4.97% last week.

Last year at this time, the 5-year ARM was averaging 2.48%.

Adjustable mortgages can be attractive because they start out with lower interest rates than longer-term loans. But then they adjust each year based on movements to the prime rate or another benchmark.

“The uncertainty and volatility in financial markets is heavily impacting mortgage rates,” says Sam Khater, Freddie Mac’s chief economist.

Before giving into despair, it’s important to note that Freddie’s weekly surveys are averages based on a wide range of quotes, and those quotes can vary significantly.

That’s why nowadays it has become “even more important” to shop around with different lenders, Khater says.

Rates once ‘unthinkable’ are fast approaching

Economists say a 7% average interest rate on the 30-year mortgage is extremely close at hand.

“With monetary policy continuing to tighten, mortgage rates are expected to continue climbing,” Ratiu says.

“While even two months ago rates above 7% may have seemed unthinkable, at the current pace, we can expect rates to surpass that level in the next three months.”

The last time the 30-year rate was in the 7% range was in early 2002 — when the median price of an existing home was just $150,900 and the typical household was paying around 30% of its monthly income on a mortgage, according to Realtor.com.

Today’s average household is spending 44% of its income on a mortgage, Ratiu says. That’s before factoring in property taxes, insurance and other housing expenses.

Mortgage applications reach deeper lows

Mortgage activity fell 3.7% from a week earlier, according to the latest Mortgage Bankers Association (MBA) survey, which ended Sept. 23.

Applications to refinance existing mortgages plunged 11% from the previous week and were 84% lower than the same week last year.

“Applications for both purchase and refinances declined last week as mortgage rates continued to increase to multi-year highs following more aggressive policy measures from the Federal Reserve to bring down inflation,” says Joel Kan, the MBA’s associate vice president of economic and industry forecasting.

With rates now more than double what they were last year at this time, refinancing is at a 22-year low, according to the MBA.

Purchase activity was down 0.4% and has fallen 29% from last year.

Meanwhile, the share of applications for adjustable-rate mortgages increased to 10.4%.

“With the recent jump in rates … ARM loans remain a viable option for qualified borrowers in this rising rate environment,” Kan said.

What to read next

  • House Democrats have officially drafted a bill that bans politicians, judges, their spouses and children from trading stocks — but here's what they're still allowed to own and do

  • Billionaire Carl Icahn warns the 'worst is yet to come' — but when an audience member asked him for stock picks, he offered these 2 'cheap and viable' names

  • Biggest crash in world history': Robert Kiyosaki issues another dire warning and now avoids ‘anything that can be printed’ — here are 3 hard assets he likes instead

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.