7% Mortgage Rates May Become the ‘New Normal’

Mortgage rates surged across the board this past week, according to Freddie Mac, with the average fixed rate on a 30-year mortgage setting a two-decade high at 6.92%. The 30-year mortgage rate is up a quarter-point over the week prior and continues to creep closer to 7%.

Additionally, 15-year fixed rates eclipsed 6%, and adjustable mortgage rates spiked by a half-point – each term is at its highest point since 2008. Here are the current mortgage interest rates, as of Oct. 13:

“Rates resumed their record-setting climb this week, with the 30-year fixed-rate mortgage reaching its highest level since April of 2002. We continue to see a tale of two economies in the data: strong job and wage growth are keeping consumers’ balance sheets positive, while lingering inflation, recession fears and housing affordability are driving housing demand down precipitously. The next several months will undoubtedly be important for the economy and the housing market.”

– Sam Khater, Freddie Mac’s chief economist, in an Oct. 13 statement

This week’s mortgage rate data comes on the heels of a worse-than-expected inflation report from the Bureau of Labor Statistics. Despite the Federal Reserve’s best efforts to tame inflation through a series of aggressive rate hikes, the consumer price index stayed stubbornly high last month. Prices rose 8.2% year over year through September, remaining well above the Fed’s 2% target for annual inflation.

Mortgage rates are likely to stay high as long as red-hot inflation persists, as foretold in July by Lawrence Yun, chief economist at the National Association of Realtors. Last week, before the BLS released its latest data, Yun predicted that rates will stay around the current “resistance point” of 7%, though it’s possible they could reach a new benchmark of 8.5%.

“We don’t want to see a bursting out of that second resistance and going up, because you’re talking about 8.5% mortgage rates, something that we clearly do not want to see,” Yun says to Pennsylvania’s Bucks County Association of Realtors.

Still, Yun says he hopes (and believes) that mortgage rates will stick around 7%, potentially retreating and bouncing higher around that touchstone. “The 7% interest rate could be the new normal,” he adds.

You may have heard the expression that homeowners are wearing “golden handcuffs.” That is, they’re chained down to their house – and more importantly, their mortgage – reluctant to sell and trade in a possibly sub-3% interest rate for a near-7% rate on a new loan. With little incentive for homeowners to move, there’s more space for first-time homebuyers to compete in today’s market.

The share of buyers who are purchasing their first home this year is 45%, up from 37% last year and on par with pre-pandemic levels, according to a new report from the real estate marketplace Zillow. The data suggests that rising mortgage interest rates are leaving repeat buyers sidelined, at the mercy of their golden handcuffs.

“First-time buyers now appear to be making relative gains as high mortgage interest rates disproportionately encourage current homeowners to stay put,” Zillow population scientist Manny Garcia says in the report. “The flow of homes into the market is slowing, suggesting homeowners are likely comparing their current low mortgage rate to today’s rates and deciding not to move.”

The report alludes to a rebalancing from the fiercely competitive sellers market of the past two years, giving first-time homebuyers “more options, more time and more bargaining power.”

Higher mortgage rates may finally provide some relief to homebuyers by cooling home prices. And although the same rate hikes have dealt a gut punch to buyers’ purchasing budgets, this is more likely to impact repeat homebuyers than first-time buyers.

“While rising mortgage rates are hurting affordability for all buyers, first-time buyers may be less deterred by higher rates because they’re comparing a monthly mortgage payment to what they’re paying in rent,” Garcia says.

According this month’s consumer price index, average rents for primary residences rose 7.2% year over year. At least with a fixed mortgage payment, buyers can avoid the uncertain cost of yearly rent hikes.