Mortgage rates have surged to their highest level in two months, just ahead of the crucial spring home-buying season, leading to a decline in demand among potential buyers.
According to mortgage buyer Freddie Mac, the average rate on a 30-year loan this week increased to 6.94% from 6.9% – marking the highest level since mid-December. Although this is lower than the peak of 7.79% seen in the fall, it remains significantly higher than the pandemic-era lows of around 3%.
Freddie Mac’s chief economist, Sam Khater, noted, “Mortgage rates continued their ascent this week, reaching a two-month high and flirting with seven percent yet again. The recent increase in rates has subdued the already tentative homebuyer momentum as we approach the spring, historically a busy season for homebuying.”
The impact of higher mortgage rates has been significant, costing borrowers hundreds more each month and potentially adding as much as $75,000 over the lifetime of a 30-year loan.
The housing market, sensitive to interest rates, has cooled rapidly due to the Federal Reserve’s aggressive tightening campaign. The Fed raised the benchmark federal funds rate 11 times over 16 meetings to combat stubborn inflation and slow economic growth. While policymakers indicated during their recent January meeting that they are halting rate hikes, they are not yet ready to implement cuts. Investors, who previously anticipated aggressive rate reductions starting as early as March, now expect them to begin in May or June, given the continued high inflation levels.
The impact of higher mortgage rates extends beyond dampened consumer demand to limiting inventory. Many sellers, who locked in low mortgage rates before the pandemic, are hesitant to sell amidst rates remaining near a two-decade high. This scarcity of available homes leaves few options for eager buyers, with available home supply down by a striking 34.3% compared to pre-pandemic levels, according to a report by Realtor.com.