Los Angeles, California: The average interest rate on a 30-year mortgage rose this week for the first time since late May, increasing the cost of borrowing money for a home.
Freddie Mac reported that interest rates rose to 6.95% from 6.86% last week. Rates averaged 6.81% a year ago. The increase came after a four-week period of declining rates, which have mostly hovered around 7% so far this year.
Rising mortgage rates have significantly increased borrowers' monthly payments and are contributing to the long-term slump in home sales that began in 2022. Rates on 15-year fixed-rate mortgages, popular with homeowners looking to refinance their mortgages, have also risen, with the average rate rising to 6.25% from 6.16% last week. A year ago, the rate was 6.24%.
A variety of factors influence mortgage rates, including the bond market's reaction to the Federal Reserve's interest rate policy and the movement of the 10-year Treasury yield, which is a proxy for mortgage prices. Treasury yields, which rose above 4.7% in late April, have generally fallen on expectations that slowing inflation may prompt the Fed to cut its key interest rate.
Federal Reserve officials have signaled that inflation is approaching its 2% target and have signaled the possibility of cutting the central bank's benchmark interest rate later this year. But until the Fed starts to cut short-term rates, long-term mortgage rates are unlikely to fall much.
Many economists expect the Fed's first rate cuts to come in September, with additional cuts possible by the end of the year. Mortgage rates could start to ease in the coming weeks if bond yields fall in anticipation of the Fed's rate cuts, according to Lisa Sturtevant, chief economist at Bright MLS.
“Today's report is not what homebuyers were expecting, but interest rates may actually start to fall sooner than expected,” she said.
During the pandemic, mortgage rates fell to record lows, sparking a surge in homebuying and sending home prices soaring. Between 2019 and 2023, the national average sales price of existing homes in the U.S. increased by more than 43%. Despite the decline in sales this year, home prices hit a record high of $419,300 in May.
High borrowing costs and record home prices have put many would-be buyers off buying during the housing market's most active period this spring. U.S. existing home sales fell for a third straight month in May and are showing signs of further declines in June.
Most economists expect the average rate on a 30-year mortgage to remain above 6% this year, double the level three years ago. “We expect rates to continue to decline moderately in the second half of the year, and rising inventory should help limit price growth, which bodes well for prospective homebuyers,” said Sam Carter, chief economist at Freddie Mac.