Mortgage rates are surging while home prices are climbing, an unwelcome combination that is dashing hopes for many Americans hoping to buy a home.
On Thursday, the mortgage finance giant Freddie Mac reported that the average 30-year fixed-rate mortgage had risen to 7.4 percent, up from 7.28 percent last week and the highest since November 2023. Last year at this time, the rate was 6.3 percent.
Mortgage rates had dipped below 6 percent in February, just before the start of the war in Iran, raising optimism that the housing market was becoming more affordable, said Kara Ng, a senior economist at Zillow, the real estate marketplace.
“Now that we’re at 7 percent, that is a very far distance to push to improve affordability,” she said. “The difference between beating a dead horse and performing CPR is a perceived probability of success.”
High home prices are compressing the market further. After skyrocketing during the pandemic, when ultralow rates led to bidding wars, prices have continued to climb moderately. Home prices rose 2.6 percent nationwide in July from the year before, according to the Federal Housing Finance Agency.
Rising prices combined with soaring rates have slowed the market to a crawl. Sales of existing homes dropped 1.2 percent in August from the year before, according to the National Association of Realtors. The prognosis for the rest of the year does not look much better: Economists at Zillow are projecting a 3.5 percent year-over-year decline in the fourth quarter.
“Housing is still rather unaffordable for a large chunk of the population,” said Nancy Vanden Houten, the lead U.S. economist at Oxford Economics, who estimates that two-and-a-half to three million people have been priced out of the market.
Mortgage rates began to edge higher in March, after the United States and Israel launched an attack on Iran. Oil prices shot up after the conflict began, and gas and diesel prices quickly followed. Although more oil is now being transported out of the Persian Gulf, the war has snarled supply chains and damaged refineries, keeping oil prices elevated.
Investors are worried that higher energy prices caused by the war in Iran, as well as mounting debt from tech giants borrowing to build their A.I. infrastructure, will push inflation higher. The yield on the 10-year Treasury note, which is linked to many business and consumer loans, including mortgages, ticked up to 5.36 percent on Thursday, the highest since 2002.
Buyers are being pushed to the sidelines. Faced with the prospect of higher mortgage rates, sellers are puling back, too. New listings of homes for sale fell 3.9 percent in September from the month before, according to Zillow.
Ms. Vanden Houten said the underlying problem was inflation, with prices rising for everyday purchases like groceries and gasoline. “More income is being eaten up by the essentials,” she said.
Homeowners are also facing other higher housing costs, said Tom Hutchens, president of Angel Oak Mortgage Solutions, a lender in Atlanta. “Affordability starts with the price of the home, but there are other factors” like taxes, repairs and property insurance, he said.
The average monthly property insurance payment for single-family mortgage holders rose to a record $209 a month in June, according to a report from the Intercontinental Exchange. Insurance represents nearly 10 percent of monthly housing costs, up from 7.5 percent a decade ago.
Mathew Wellhausen, who works in construction design in St. Louis, was well aware of the challenges when he and his wife started looking for a new home about four years ago. But the costs were too high, so they put off their search.
“We pumped the brakes because we thought the market was unfair,” said Mr. Wellhausen, 40. “We wanted to see what would happen.”
Rates and prices continued to climb, but the extra time allowed them to build a bigger down payment. The couple finally decided to take the plunge in September. By shopping around, they were able to land a 6 percent mortgage rate.
Dr. Ng, the Zillow economist, said she was concerned that rising mortgage rates would push buyers to a “psychological cliff.”
“People are saying ‘I’m not even going to try’ whereas they might be able to afford a home if they just ran the math,” she said.
Despite the gloomy outlook, she and other economists expect the market to eventually bounce back after inflation eases and mortgage rates start to fall again, although when that will happen is difficult to predict. “You’re probably getting peak doom right now,” Dr. Ng said.
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