Mortgage rates shot above 6 percent this week for the first time in 14 years as inflation has remained resistant to the Federal Reserve’s efforts to tamp it down. The dramatically swift escalation has chilled what had been a hot U.S. housing market, increasing pressure on an economy plagued by unremitting inflation.
The 30-year fixed-rate mortgage — the most popular home loan product — soared to 6.02 percent this week, nearly double what it was nine months ago, according to data released Thursday by Freddie Mac. It has not been this high since November 2008.
The jump came as inflation data released by the Bureau of Labor Statistics this week showed consumer prices accelerating in August, particularly for items such as housing and food. The consumer price index had housing costs up 0.7 percent in August and 6.2 percent higher annually, the largest increase since 1990.
“Mortgage rates have gone up four weeks in a row because of investors’ concerns about inflation,” said Holden Lewis, home and mortgage expert at NerdWallet. “Their worries are warranted, as we learned this week that inflation ran hotter than expected in August, as reflected in the consumer price index. That news boosted mortgage rates higher — a phenomenon that will be reflected in next week’s rates.”
The 30-year fixed average began the year at 3.22 percent. After soaring to 5.81 percent in late June, it eased in July and early August as fears of a recession took hold. But since falling to 5.13 percent on Aug. 18, the 30-year fixed average has climbed nearly a percentage point in a month. Rates are still below the historical average of 7.8 percent, according to Freddie Mac.
The sudden spike in rates this year has made homes less affordable and cooled sales. Prices have begun to moderate but remain elevated. The most recent Standard & Poor’s Case-Shiller home price index showed prices up 18 percent annually in June, down from 19.9 percent the previous month. Home sales fell in July for the sixth month in a row. Housing starts, a measure of new home construction, also sank that month.
“Mortgage rates at or above 6 percent is likely the new reality and prices will have to adjust,” said Lisa Sturtevant, chief economist with Bright MLS, the area’s multiple-listing service. “Relatively strong demand and still-low inventory will continue to support stable or growing prices in most markets, but gone are the days of seeing offers tens or even hundreds of thousands of dollars over asking price. In some places, particularly high-cost markets and places where prices have grown fastest over the past two years, we could see year-over-year price declines.”
Demand for mortgages has fallen as swiftly as rates have risen. Total application volume fell for the fifth week in a row, according to the Mortgage Bankers Association. Refinances are off 83 percent from where they were a year ago.
“With all eyes on the Federal Reserve’s next steps to tame high inflation, borrowers can expect continued volatility in mortgage rates,” Bob Broeksmit, MBA’s president and chief executive, wrote in an email.
Home affordability fell to a new low for first-time buyers in the second quarter, according to a recent analysis of the nation’s largest metropolitan areas by NerdWallet. Even though more homes came on the market, higher prices and stagnant wages kept buyers on the sidelines. NerdWallet found that homes were listed for sale at 6.5 times the typical first-time buyer’s income across 50 U.S. metros, and 6.6 times their income across the nation. The recommended standard for first-time buyers is three times their income.
August’s inflation reading surprised investors, who are wondering whether the Federal Reserve will consider lifting its benchmark rate by 100 basis points, rather than 75 basis points as it did in July. (A basis point is 0.01 percentage point.) The Fed’s rate-setting committee meets next week.
In an effort to tamp down inflation, the central bank has raised the federal funds rate four times this year. It started with a 25-basis point increase in March, followed by a 50-basis point increase in May and back-to-back 75-basis point hikes in June and July. The Fed will probably want to see signs inflation is abating before it pulls back on raising rates.
“The Federal Reserve was already going to increase short-term rates next week in its effort to restrain inflation,” Lewis said. “They might dial up the aggressiveness in response to this week’s unexpectedly high inflation report, further propelling mortgage rates upward.”
When investors are worried about inflation, their appetite for buying bonds diminishes because the return on their investment is less when inflation is high. Inflation erodes the value of a bond’s future payments. Less demand causes bond prices to drop and yields to rise. Since mortgage rates tend to follow the same path as the 10-year Treasury yield, they rise, too.
The yield on the 10-year Treasury popped back up to 3.42 percent on Tuesday before slipping to 3.41 percent on Wednesday, its highest level since mid-June.
“The higher-than-expected CPI gave the Fed the permission to push forward with their 0.75 percentage point increase with some economists suggesting even a one percentage point increase would be viable,” said Nicole Rueth, senior vice president at the Rueth Team. “Mortgage rates have already baked in this move with the jump we saw over the last two days.”
Mortgage rates might not have peaked yet, Rueth said.
“Comparative inflation from a year ago still has us replacing a very low inflation in September 2021,” she said. “With today’s inflationary pressures ... we could see September’s CPI — released early Oct — still higher. October 2021’s inflation started the trend higher, so year-over-year comparisons will give us some relief. As inflation comes down, so will mortgage rates.”
A previous version of this story said the consumer price index of housing costs experienced its largest increase since 1991. It is the biggest increase since 1990.
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