Mortgage Charges Are Climbing Traditionally Quick. Don’t Anticipate Them to Gradual Down.

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The rising cost of buying a home is beginning to drive potential buyers out of the market altogether.

Justin Sullivan/Getty Images

Mortgage rates rose dramatically this week, posting their biggest weekly rise in 35 years, according to data released on Thursday.

The average interest rate on a 30-year fixed-term loan rose 0.55 percentage points to 5.78% this week, the highest since November 2008, it said

Freddie Mac
‘s

Primary Mortgage Market Survey released Thursday morning. It was the biggest week-on-week increase since 1987, said Freddie Mac chief economist Sam Khater.

“These higher interest rates are the result of a shift in inflation expectations and the stance of monetary policy,” Khater said. “Higher mortgage rates will lead to a slowdown in the rapid pace of housing activity we’ve seen post-pandemic, ultimately leading to a more balanced housing market.”

Interest rates have risen at an historic pace this year, making it harder for buyers to afford a home. According to Dow Jones Market Data, the interest rate on a 30-year loan rose 2.67 percentage points this year through June 16, the largest jump in the history of Freddie Mac’s survey over the period.

The rise in interest rates this week was fueled by a sell-off in mortgage-backed securities (MBS). Treasuries were also hit by the slowdown, sparked by Friday’s hotter-than-expected inflation report and expectations of a more aggressive rate hike by the Federal Reserve. The 10-year Treasury yield, which heavily influences mortgage rates, rose to 3.39% on Wednesday from 3.16% on Friday. (Bond yields rise when purchase prices fall.)

Rising interest rates are adding pressure on a housing market already weighed down by house prices, which have risen rapidly throughout much of the pandemic. At 5.78%, a 30-year term loan on a $500,000 home would cost $632 more per month than it did at the end of 2021, according to a Realtor.com mortgage calculator. (Barron’s is owned by the same parent company that operates Realtor.com.)

In a note Tuesday, Evercore analyst Stephen Kim said Freddie Mac’s reported rate could soon jump to 5.85%, Barron’s reported.

While interest rates are likely to fluctuate from day to day, they are unlikely to return to last year’s levels due to the Fed’s actions to control inflation. Persistently higher mortgage rates could further cool a housing market slowing from its pandemic frenzy due to a lack of affordable homes to buy.

“The housing market has slowed significantly over the past month as rate hikes take hold,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association, after the Fed’s decision on Wednesday to raise interest rates by 0.75 percentage point. “We expect this slower pace to continue through the summer, but buyers may return later this year as the Fed’s plans become better understood by the market and result in reduced interest rate volatility.”

The Mortgage Bankers Association’s weekly census of mortgage applications showed applications for a home-buying loan last week were down 16% from a year earlier.

Factors such as rising interest rates and home prices have also weighed on builder sentiment. The National Association of Home Builders’ index, which measures home builder confidence, fell in June for the sixth straight month to its lowest level since the same month in 2020, the trade group said on Wednesday.

“Six consecutive monthly declines for the [index] is a clear sign of a slowing housing market in an economic environment of high inflation and slow growth,” said Robert Dietz, the trade group’s chief economist, adding that the rising cost of buying a home has particularly weighed on first-time buyers. “Builders are taking a more cautious stance as demand eases with higher mortgage rates,” he said.

May new home construction data, released Thursday morning, added to the bad sentiment. According to data released by the Census Bureau and the Department of Housing and Urban Development, two indicators of home construction, housing starts and permits, fell further-than-expected in May.

Launches fell 14.4% month-on-month to a seasonally adjusted annualized rate of 1.55 million, while approvals fell 7% to about 1.7 million.

Both declines were larger than expected. Consensus estimates collected by FactSet expect permits to fall about 1.3% from their April preliminary rate to a seasonally adjusted annual rate of 1.8 million and housing starts to fall about 0.5% from April preliminary rate will fall to 1.7 million.

Corrections & additions: Freddie Mac’s chief economist Sam Khater said this week’s 0.55 percentage point weekly rise in the average 30-year interest rate was the largest since 1987. A previous version of this article and headline incorrectly said this was the biggest jump on the record and incorrectly said the survey began in 1987.

Write to Shaina Mishkin at [email protected]