Haunted by high prices and low inventory, the U.S. housing market can sometimes seem like a horror movie to potential homebuyers. Now there are fears that one villain has returned from the dead: the 7% mortgage interest rate.
After a spike in mortgage rates in March 2022, when the Fed embarked on a series of rate hikes to suppress inflation, the 30-year interest rate reached 8% in October 2023.
Mortgage rates began to fall again last December, when they fell below 7% for the first time in four months. Forecasters have suggested that the 7% rate is dead and gone, and put forward predictions that rates will fall below 6% by the end of 2024, but the 7% rate may have some life yet. US economic growth is still running at a hotter pace than expected, and this is continuing to keep overall interest rates and mortgage rates high.
But fear not: Interest rates will still fall in the latter half of this year, economists tell MarketWatch.
Mortgage rates rose last week after data indicating a rise in consumer and wholesale prices last month, and a recovery in the labor market. With the Fed now expected to postpone interest rate cuts until the second half of the year, mortgage rates are rising again across the board.
30 years has already exceeded 7%, according to some sources
Mortgage lenders set their rates based on a number of factors, which include the borrower's credit score, loan-to-value ratio and other market factors. That's causing a huge discrepancy: The 30-year mortgage rate had risen to 7.14% as of Friday afternoon, according to a survey by Mortgage News Daily.
Freddie Mac, which bases its estimates on thousands of mortgage applications, said its gauge showed interest rates rising 13 basis points to 6.77% as of February 15. The Mortgage Bankers Association, whose data comes one week apart, noted that the average contract rate for a 30-year mortgage was 6.87% last week, with the 30-year jumbo loan already at 7%.
“What's happened right now is that there's been some strong data that people are eagerly anticipating, including the CPI itself, and they're concluding that the Fed is going to change the pace or timing at which they're going to cut rates,” said Doug Duncan, chief economist at “Interest rates are too high,” Fannie Mae told MarketWatch in a phone interview Friday.
“This is the uncertainty in the market,” he added. “But they also ignore the fact that consumer spending came in very weak and some of the other macro indicators came in even weaker.” Retail sales fell to a 10-month low in January, and delays in Payments on credit card and auto loans are at their highest levels in more than a decade, and consumer credit growth has slowed significantly.
The InterContinental Exchange, which also tracks mortgage rates, noted that the 30-year interest rate was as high as 6.87% in the past few days. But “borrowers with lower credit scores, those getting cash-out refinances, and jumbo loan borrowers are all seeing offers above 7% again on average,” Andy Walden, vice president of enterprise research strategy at ICE, told MarketWatch.
“As for why interest rates are rising, it is as simple as market expectations meeting the reality of recent economic reports,” Walden explained.
He added that the strong economic data that exceeded what the market was expecting, in turn, caused uncertainty in the market regarding the possibility that the Fed will begin easing interest rates early this year.
Other factors that can lead to higher mortgage rates
Two other factors are “still stuck” in the shadows, Lawrence Yun, chief economist for the National Association of Realtors, confirmed to MarketWatch.
This is the “massive issuance of government bonds to finance the large federal budget deficit,” Yoon said. “It is beyond the Fed’s control, but absorbing such an amount means there is a need to offer higher interest rates.”
And let's not forget the possibility of a government shutdown in March, he added, “disruptions in government bond payments may also play a role.”
However, Yoon stated that the 30-year rate of return as measured by Freddie Mac is “unlikely to rise to 7%.” “It is very likely that we will see weekly bounces, but I think the average price will be closer to 6% by the end of the year.”
Fannie Mae says interest rates will return below 6%
The return of higher mortgage rates is a thorn in the side of the real estate industry, as it is likely to keep sales low in the spring homebuying season.
In 2023, home sales hit a 29-year low amid historic unaffordability. There were few homes for sale on the market, and buyers were dealing with mortgage rates of 8%. The price of a typical home in the United States is about $402,300, according to Redfin.
One agent noted that the current data scares people.
“A lot of my clients are paying close attention to what the Fed is saying,” Hal Bennett, a Bellevue, Wash., real estate agent with Redfin Premier, said in a statement.
He added: “Buyers and sellers came off the sidelines in December when the Fed indicated it would cut interest rates three times next year, but some are now feeling hesitant because the Fed has indicated that interest rate cuts may come later than expected.” “.
Duncan and his team at Fannie Mae said they remain committed to their forecast, which expects the 30-year rate to fall below 6% by the end of the year. “I see no reason at this time to change these expectations,” Duncan said. He added that the jump in interest rates “is the market's reaction to short-term factors.”
He also encouraged homebuyers to shop around for lower prices. “Lenders don't make any money unless they make you a loan,” Duncan said. “So you have to walk in the door knowing that they're going to give you a loan, and if you let them compete, you're going to get a better deal than if you just [go with] One.”
“I'm doing it myself,” he added. “I've never taken out a mortgage where I didn't talk to at least three mortgages [lenders] And every time I got a better deal.
