Mortgage Rates Hit 7%, Posing Another Challenge for Home Buyers: NPR

Mortgage rates hit 7% for the first time since May 2024 on Thursday, further dampening an already difficult housing market.

The rise in mortgage rates comes even after the Federal Reserve cut interest rates by a percentage point in recent months – which had raised hopes among homebuyers that financing costs would ‘a house could go down.

But instead, mortgage rates climbed. What gives? And what does this tell us about the outlook for the real estate market this year?

Here are four things to know about mortgage rates and the real estate market.

Why are mortgage rates rising even though the Fed is cutting rates?

To answer this question, it is worth remembering that the Fed can influence mortgage rates, but it does not set them.

In a nutshell, the Fed sets short-term interest rates, but mortgage rates primarily track a different number: the yield on 10-year Treasury bonds.

This yield has increased significantly in recent months for several reasons. Inflation has remained stable, meaning the Fed could be more cautious in cutting rates.

And the economy is strong. That means the Fed can afford to wait longer to cut interest rates, especially since a stronger economy can also contribute to higher inflation.

It’s also worth remembering that while a 7% rate may seem high given that mortgage rates fell to 2.65% in early 2021, they are not high historically.

In fact, these mortgage rates were often 6 or 7 percent, or sometimes more, in the 1990s and early 2000s, and were in the double digits in the 1970s and 1980s.

But that’s probably little consolation for homebuyers who have grown accustomed to low mortgage rates in recent years, especially since home prices have risen so much. The median sales price of an existing home has increased by 50% over the past five years.

So where are mortgage rates going?

This question is difficult to answer because mortgage rates depend on many factors.

But there’s one thing experts generally agree on: They’re unlikely to return to the low levels we saw just a few years ago.

“They should turn some down,” says Sam Khater, Freddie Mac’s chief economist. “But I think the new normal is 6 to 7 percent in this world of high economic growth and constant inflation.”

For now, it is difficult to imagine a substantial decline in bond yields. The Fed projects it will cut interest rates only twice more this year, which would likely keep bond yields higher. That means mortgage rates could also stay higher, which would be bad news for homebuyers.

What the real estate market will look like in the coming year

High mortgage rates will create additional challenges for the housing market as it seeks to recover from a difficult year.

Final totals have not yet been released, but 2024 was on track to be. fewest existing home sales since 1995. Several factors have led to a slowdown in sales, in addition to high mortgage rates. Low inventory levels – as well as the surge in home purchases during the pandemic – have also had an impact.

Bob Broeksmit, president and CEO of the Mortgage Bankers Association, said in a statement that “the upward drift in mortgage rates…is dampening homebuyer demand.” Mortgage applications to buy a home are down 2% from a year ago, he says.

But Freddie Mac’s Khater says he expects the real estate market to do well.

“House prices and the real estate market will be able to withstand rising interest rates because the economy is strong,” he says.

Khater believes there are households who won’t necessarily be deterred by high mortgage rates, including many first-time home buyers.

“There is a significant segment of renters who are reasonably affluent and reaching their mid-30s or early 40s who want to buy,” he says. walk.”

So what does this mean for home buyers?

Well, it’s difficult, but there are a few things. The first is to shop around with different mortgage lenders to see who can offer you the best rate. Talking to multiple lenders really makes a difference – and of course, a lower mortgage rate means a lower monthly payment.

Second, if you’re feeling frustrated with what you can afford, you may need to expand where you’re looking and consider different neighborhoods or locations within your metro area.

Prices can vary considerably. Therefore, if you feel like you stand out, it might be beneficial to broaden your search.