Mortgage rates have crept back over 7% to start the new year in a potentially troublesome development for the housing market that has struggled under the weight of higher interest rates for two years that have priced people out of the market and slowed sales to 20-year lows.
The average rate on a 30-year, fixed-rate mortgage climbed to 7.04%, according to mortgage purchaser Freddie Mac. It is the first time rates had climbed above 7% since May and hit a figure that creates a barrier for many buyers and would-be sellers.
Higher interest rates add to problems with affordability that have hammered the housing market the last two years. Prices have continued to climb despite slower sales volume, posting 17 consecutive months of year-over-year increases for existing homes to an eye-popping sum of $406,100 as of November, according to the National Association of Realtors.
On top of high prices and interest rates, other costs of homeownership have climbed dramatically since the pandemic-era market boom. Property taxes have skyrocketed with the rapid uptick in home values and home insurance has significantly outpaced inflation as severe weather becomes more common and destructive, increasing rates across the board as insurers spread the risk throughout their pool of clients.
The nationwide average premium on owner-occupied homeowners’ insurance rose about 11% in 2023, according to research by S&P Global.
Added together, the costs of owning a home have created one of the most unaffordable periods in American history and produced a housing affordability crisis, particularly in areas with a high cost of living.
The increase in interest rates to start the year raised concerns about whether the housing market will be able to break out of its slump. Existing home sales for 2024 are on pace to finish at the lowest level since 1995 for a second consecutive year and 7% mortgage rates bring little optimism about changes in buyer behavior to start 2025.
Most economists and housing analysts are expecting rates to remain elevated and volatile throughout 2025 with inflation lingering, the Federal Reserve dialing back its expectations on making cuts to its benchmark rate and the uncertainty of the incoming Trump administration’s economic agenda that has spurred fears of inflation from tax cuts and tariffs on imports.
The Fed cut its benchmark interest rate three times last year but is now in a waiting period to see what happens with inflation and government outlays in the year ahead. Officials also dialed back the number of cuts they expected for 2025 with inflation over its 2% target and an economy that has chugged along with low unemployment and steady growth.
The Fed’s benchmark rate does not directly affect mortgage rates, which instead tend to follow the yield on 10-year Treasury bonds. Yields have been on the rise in recent weeks as investors react to the news of fewer rate cuts from the Fed and have concerns about inflation and other economic factors.
“Bond yields in the U.S. and abroad continued to move higher in response to concerns over a sticky inflation outlook and still too-high budget deficits, which pushed mortgage rates higher for the fifth consecutive week,” said Joel Kan, vice president and deputy chief economist at the Mortgage Bankers Association.
What happens with mortgage rates will be vital to the housing market’s recovery. Slight shifts in rates in 2024 have prompted short-lived rushes of sales, including in October when the market posted its first gain in more than three years.
An open question is what level of mortgage rates will be acceptable or affordable for buyers on the sidelines. Just a couple percentage points on a loan the size of a mortgage can mean the difference of hundreds of dollars on a monthly payment and hundreds of thousands over the 30-year loan.
“For those people who are hoping the interest rates are going to come back down to the low single digits, I think they’re going to be waiting forever. I don’t think that’s happening,” said said Keith Munsell, head of the real estate concentration at Boston University’s Questrom School of Business.
High rates have also suppressed the level of supply on the existing home market as homeowners opt to stay put instead of moving to a different area or upgraded home because of the “lock-in effect” of having a low mortgage rate through purchasing or refinancing during the pandemic.
Supply has favored sellers for years with a shortage of homes available, which has kept prices moving upward even though the market is expected to set two 20-year lows in a row. Inventory sat at the equivalent of 3.8 months’ supply at the end of November, and a five- to six-month supply is considered balanced.
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