This week, the average interest rate on a 30-year fixed mortgage in the US went up to 6.32%, which is marginally higher than the 6.27% rate from the previous week. The Federal Home Loan Mortgage Corporation (FHLMC), also known as Freddie Mac, reports that the increase in borrowing costs occurs at a time when homebuyers are already coping with a difficult housing market that is marked by a shortage of inventory and rising property prices.

Short-term economic uncertainty may be lessened, according to experts, by significant advancements in the U.S. economy, like falling inflation and growing employment prospects.Sam Khater, chief economist at Freddie Mac, stressed that the recent rise in mortgage rates does not always indicate the state of the economy as a whole. It is important to keep in mind that the increase in rates is mostly the result of changes in expectations rather than the underlying economy, which has remained robust for the majority of the year. Higher rates make affordability more difficult, but they also demonstrate the strength of the economy, which should help the housing market rebound.

The bond market’s response to the Federal Reserve’s interest rate changes is one of the major factors influencing mortgage rates.The 10-year Treasury yield, a crucial benchmark used by lenders to determine mortgage rates, is especially important. The 10-year Treasury yield increased significantly from 3.62% in mid-September to 4.1% as of Thursday. Around the time the Federal Reserve lowered its benchmark lending rate by 0.5 percentage points, this spike happened.

The Federal Reserve has raised interest rates seven times since March 2022 in an attempt to keep inflation under control. Higher borrowing prices for a variety of loans, including mortgages, have resulted from these rate increases.Existing homeowners have found it more difficult to sell or refinance their homes as a result of the lock-in effect, as many are afraid they won’t be able to get a new mortgage with a better interest rate. The already limited number of available homes is being exacerbated by this effect.

The real mortgage landscape

High borrowing prices are making affordability issues worse in the current market. In addition to increasing mortgage rates, prospective homeowners must cope with historically high real estate costs and a shortage of available properties. Home prices have stayed high even if the market has somewhat cooled. The National Association of Realtors (NAR) reports that the median price of homes sold nationwide rose 3.1% in the last 12 months, to $416,700 in the most recent month. Nevertheless, despite price increases, home sales have decreased by more than 4%, indicating the continued pressure on affordability.

Despite recent increases, mortgage rates are still below the May 2024 peak of 7.22%. As markets awaited the Federal Reserve’s decision to cut its main interest rate in September for the first time in almost four years, mortgage rates had really been steadily falling since July. Although this ruling provided some respite for potential homeowners, the current rate hike emphasizes the ongoing volatility that has defined the housing market in recent years.

The housing market is facing two challenges, according to Taylor Marr, deputy chief economist at real estate agency Redfin.A double-edged sword for the housing market is high mortgage rates. They reduce demand by making it more expensive to purchase, but they also maintain a low inventory because existing homeowners are reluctant to give up their favorable mortgage rates. Due to the low inventory and the fact that cost is still a major concern, this dynamic is making it tough for both buyers and sellers.

There is a chance that relief will arrive soon. Federal Reserve officials have stated that they intend to lower interest rates further over the coming years. It is possible that these rate cuts will start later this year and last until 2025 and 2026. If implemented, these cuts are expected to gradually lower borrowing costs, making home purchases more affordable for buyers and potentially helping tostabilize the housing market.