US mortgage rates pushing past 7% hint at tough road ahead
US HOMEBUYERS contending with the highest borrowing costs in eight months are seeing mortgage rates rise past a psychological barrier that risks complicating purchase decisions even more.
Rates for 30-year loans have crossed 7 per cent, a key level that may keep the housing market in the doldrums for some time to come. And with US economic strength signalling that policymakers may move carefully with any interest rate cuts, it is unclear whether buyers will get substantial help soon.
“The hope in 2025 was that we were going to see affordability relief,” said Ali Wolf, chief economist at Zonda, a homebuilding analytics firm. “But all signs point to costs getting more expensive. Home values are still rising, rates are going up, and so are insurance costs and property taxes.”
That outlook marks a major shift from September, when the Federal Reserve started cutting and mortgage rates fell to a two-year low, boosting optimism for a housing recovery. Persistently high rates, coupled with prices that have stayed elevated, threaten now to squeeze affordability even more and keep sales at a sluggish pace.
The contract rate on a 30-year mortgage hit 7.09 per cent in the week ended Jan 10, according to data released on Wednesday (Jan 15) by the Mortgage Bankers Association. On Mortgage News Daily, which updates more frequently, the average was even higher at 7.13 per cent.
In many ways, the US economy is chugging along. A robust jobs report last week led traders to dial back expectations about the Fed’s pace of rate cuts. And while a measure of consumer prices rose less than expected in December, policymakers will likely need to see more signs of softer inflation before cutting again.
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For homebuyers, that raises the risk that mortgage rates stay high for longer.
“The conquering of inflation will be a key factor in bringing down the mortgage rates, which so far have refused to budge even as the Federal Reserve has been cutting other interest rates,” Lawrence Yun, chief economist for the National Association of Realtors (NAR), said.
High costs and a long-running shortage of affordable listings are restricting who can afford to enter the housing market. First-time homebuyers are facing one of the toughest times in years. They made up just 24 per cent of the buyers in the year to June 2024, the lowest share on record, according to the NAR.
“Affordability is still a top concern,” said Mark Palim, chief economist at Fannie Mae. “Rates are a dampener on transactions, so we have to see what happens in the next few months.”
Consumer psyche
While 7 per cent is the highest since May, it is at least lower than in October 2023, when rates were inching higher towards 8 per cent. And there are signs that some consumers are starting to accept high rates, according to NAR’s Yun.
It is particularly showing up with sellers. More owners have listed properties even if it means having to move and risk giving up their own, often lower, mortgage rates. In the four weeks ended Jan 5, active listings were up nearly 11 per cent from a year earlier, according to Redfin data.
“The job market is good, the stock market is high and mortgage rates may not be a bigger factor than before. Inventory appears to be the bigger story,” Yun said. “Even as interest rates were rising, inventory grew, resulting in more sales this fall.”
What could be most key for the housing market is interest rate stability. As buyers finally get more home options to choose from and adjust their budgets and expectations, Zonda’s Wolf said more certainty around borrowing costs is likely to help re-energise the market.
“The consumer psyche around interest rates is a moving target,” she said. “What consumers do want to know is that if they start looking for a home, they will still be able to afford it when they are ready to purchase.” BLOOMBERG
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