The average interest rate on a 30-year mortgage rose this week, its first increase since late May, raising the cost of borrowing for a mortgage. Rates rose to 6.95% from 6.86% last week, up from the 6.81% average a year ago, according to Freddie Mac. The increase follows four weeks of declines in the average rate, which has hovered around 7% for the most part of the year. Rising interest rates could significantly increase monthly costs for borrowers and further depress home sales, which have been sluggish since 2022.
Borrowing costs for 15-year fixed-rate mortgages, a popular option for refinancing mortgages, also rose, with the average rate rising to 6.25% from 6.16% last week. A year ago, the rate was 6.24%, Freddie Mac reported. Mortgage rates are influenced by several factors, including the bond market's reaction to the Federal Reserve's interest rate policy and movements in the 10-year Treasury yield, which guides mortgage pricing. Yields, which rose above 4.7% in late April, have generally retreated on expectations that slowing inflation would prompt the Fed to cut its key interest rate. The key rate is now at its highest level in more than 20 years.
Fed officials have signaled that inflation has been moving closer to its 2% target level in recent months. They have signaled the prospect of cutting the central bank's benchmark interest rate once this year. But long-term mortgage rates are unlikely to fall significantly until the Fed starts to cut short-term rates. Many economists predict the Fed's first rate cut could come in September, with one more likely by the end of the year. Lisa Sturtevant, chief economist at Bright MLS, noted that mortgage rates could start to ease in the coming weeks if bond yields fall in anticipation of a Fed rate cut. She noted that while today's report may disappoint homebuyers, interest rates could start to fall sooner than expected.
During the pandemic, mortgage rates have fallen to record lows, spurring interest in homebuying and driving prices up more than 43% from 2019 to 2023. Despite sales declining this year, home prices hit an all-time high of $419,300 in May. High borrowing costs and record prices have deterred many potential buyers from buying this spring. Sales of existing homes in the U.S. fell for the third straight month in May, with signs pointing to a similar decline in June. Most economists expect the average interest rate on a 30-year mortgage to remain above 6% for the rest of the year, but it's still double the average rate from three years ago.
Freddie Mac Chief Economist Sam Carter offered a cautiously optimistic outlook, predicting a gradual decline in interest rates later this year. More inventory would slow price growth, benefiting potential homebuyers. In summary, the recent rise in mortgage rates highlights the ongoing challenges facing the housing market, where rising borrowing costs and high home prices continue to hinder home sales. However, expected Federal Reserve rate cuts and the possibility of lower bond yields could provide some relief to homebuyers in the near future.