(The hill) – The interest rate on the 30-year fixed-rate mortgage hit a 10-year high of 5 percent on Thursday, continuing the steep climbs that began last December in a U.S. housing market where values are rising.
The interest rate on the most popular US mortgage is up nearly 2 points from 3 percent a year ago, according to the latest figures from state mortgage manager Freddie Mac. The last time the 30-year fixed-rate mortgage hit 5 percent was February 2011.
Fifteen-year fixed-rate mortgages averaged 4.17 percent this week, up from 3.91 percent last week and 2.35 percent a year ago.
“This week, mortgage rates averaged 5 percent for the first time in over a decade,” said Sam Khater, Freddie Mac’s chief economist. “As Americans grapple with historically high inflation, the combination of rising mortgage rates, soaring home prices and tight inventories is making the pursuit of home ownership the most expensive in a generation.”
Adjustable rate mortgages have also risen sharply, with the 5-year standard Treasury indexed mortgage averaging 3.69 percent, up from 2.8 percent last year.
As a result of rising interest rates, the mortgage market is seeing a drop in activity, according to trade group Mortgage Bankers Association (MBA), as prospective homeowners reconsider buying homes and investing in real estate.
A mortgage market index by the MBA shows loan application volume down 1.3 percent from the previous week. Application volume for home refinance fell 5 percent for the week and 62 percent year-on-year.
“The rapid rise in interest rates, caused by the Federal Reserve’s much faster pace of rate hikes and balance sheet reductions, is a reaction to a booming job market and inflation at a 40-year high,” Mike Fratantoni, an economist with an MBA , said in a statement. “The rise in mortgage rates will slow the housing market and further reduce refinancing demand for the remainder of this year. Higher home prices and interest rates, along with ongoing supply constraints, are now expected to result in an annual decline in existing home sales.”
In addition to high interest rates, home sales due to the pandemic are also facing increased prices in the real estate market and shortages of building materials as part of larger supply chain disruptions, which are contributing to inflation.
“Elevated inflation continues to drive up mortgage rates,” Nadia Evangelou, an economist with the National Association of Realtors (NAR), said in a statement. The higher interest rates “increased the monthly mortgage payment on an average priced house by about $400. That means prospective buyers have to spend more of their housing budget to buy a typical home.”
Wage data released this week by the Labor Department showed a 2.7 percent fall in real wages from March last year. The change in earnings, coupled with a 0.9 percent decline in the average work week, led to a 3.6 percent fall in real average weekly earnings last year.
“If you compare inflation to real wage growth since 2008, this is the first time that inflation has risen so much faster than wages,” Evangelou said. “With borrowing costs rising, around 16 million households are expected to be taken off the market this year. As a result, NAR forecasts that home sales activity will decline by approximately 10 percent in 2022.”
According to an index compiled by NAR, housing affordability fell in February. Compared to last year, the group found that the median mortgage payment increased more than 30 percent, while median family income increased just 3.6 percent.
To combat inflation, some analysts have suggested that the Federal Reserve could raise interest rates by up to six times this year, taking the federal funds rate to 1.9 percent by the end of the year. The risk of such a hike is a contraction in the economy, but with inflation itself a driver of recession, most analysts see the Fed doesn’t have much choice.
“The twin shocks of the war in Ukraine and the increasing momentum of elevated inflation in the US and Europe will lead to a US recession and a euro area growth recession within the next two years,” researchers at Deutsche Bank predicted earlier this month .
“More worryingly, particularly in the US, are signs that the underlying drivers of inflation, emanating from very tight labor market conditions and spreading from goods to services, have broadened,” the company said. “The forecast assumes inflation will ease back to more desirable levels over the next few years, provided there are no further geopolitical or other supply shocks and central banks take timely action to anchor inflation expectations. Should these assumptions prove wrong, inflationary pressures, central bank tightening and the economic slowdown could all be more intense than baseline forecasts.”