The interest rate on America’s most popular mortgage hit 5% for the first time in more than a decade, extending a sharp rise that has yet to significantly slow the red-hot housing market.
Interest on the average 30-year fixed-rate mortgage climbed from 4.72% a week ago to its highest level since early 2011, government-mortgage company Freddie Mac said Thursday. Fifteen months ago, mortgage rates were at all-time lows.
Rates’ fastest three-month increase since 1987 has made the housing market ground zero for the Federal Reserve’s efforts to tame inflation. Homebuyers, already facing surging house prices, are now contending with a substantial increase in financing expenses, further lifting monthly payments.
A year ago, buying the median American home at prevailing rates meant a monthly mortgage bill of about $1,223 after a 20% down payment, according to calculations by George Ratiu, an economist at Realtor.com. At recent rates, such a purchase would require a monthly payment of nearly $1,700—a 38% increase, he estimated. News Corp, the parent of The Wall Street Journal, operates Realtor.com.
Even compared with searing inflation elsewhere in the economy, that counts as extraordinary price growth. It also strikes at the bedrock of many families’ finances, Mr. Ratiu said. “Most Americans who buy a home are in a sense making the biggest purchase of their lives,” he said.
Though rising rates have made buying more expensive, the housing market has remained tight. The S&P CoreLogic Case-Shiller National Home Price Index rose 19.2% in the year that ended in January.
Interest rates are rising elsewhere in the economy too, lifted by the Fed’s plans to raise benchmark overnight-lending costs and draw down its support for bond markets. In doing so, the Fed aims to bring demand into balance with supply, chilling upward pressure on prices.
The central bank is responding to inflation that has now reached its highest pace in four decades. The government said Tuesday that March’s consumer-price index rose 8.5% year over year, as costs soared for energy, food, and airfare. With unemployment nearly back to pre-pandemic levels and close to all-time lows, Fed officials have called fighting inflation their priority.
As the bank’s policy shifts, much of the fallout plays out far from the view of everyday people, such as through higher financing costs for corporations and muted investment incentives for money managers. Rising mortgage rates, on the other hand, literally hit home.
Financing property was cheap for much of the pandemic. The 30-year rate was under 3% for more than half of 2021. In January of that year, it had hit an all-time low of 2.65%. Those rates helped fuel the biggest boom in sales of previously-owned homes since 2006. Freed from remote work and lured by inexpensive financing, families left apartments in New York, San Francisco, and other metropolises for more spacious suburban houses. Growing ranks of millennials—many starting families and entering their prime home-buying years—joined the crowd of bidders too.
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