Mortgage rates ballooned over 6% for the first time since the Great Recession as the Federal Reserve aggressively cranks up interest rates to crush inflation.
As of Thursday, the average 30-year fixed-rate mortgage was 6.02%, up more than 3.1 percentage points from a year before, according to Freddie Mac. That is a 0.13-point jump in the past week alone. The average 15-year fixed-rate mortgage popped to 5.21%.
Mortgage rates have been on an upward trajectory since just before the Fed started jacking up its interest rate target (which is a different, very short-term rate) in March. At the beginning of this year, mortgage rates were hovering at an ultra-low 3%, fueling a massive housing boom and sending homebuyers into a frenzy.
The Fed, which traditionally raises interest rates by a quarter of a percentage point, or 25 basis points, has been hiking at an incredible rate. In total, the central bank has jacked up rates by a whopping 225 basis points this year alone.
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The Fed has raised rates twice by 75 basis points so far this year. The first hike marked the most aggressive increase since 1994, and it is expected that there will be another jumbo rate hike following the Federal Open Market Committee’s meeting next week.
Rate hikes by the Fed and subsequent increases in mortgage rates have made housing less affordable for people, causing home sales to tumble.
“A 6% mortgage rate isn’t just a psychological threshold. It is a major threshold of affordability, particularly for first-time homebuyers,” said Greg McBride, the chief financial analyst at Bankrate, told Bloomberg.
“The increase in mortgage rates since the beginning of the year has had the same impact on affordability as a 28% increase in home prices — and that’s on top of the already heady appreciation seen the past couple of years,” McBride said.
New home sales in July plummeted from the month before, dropping a massive 12.6% to a seasonally adjusted annual rate of 511,000, a report from the Census Bureau indicated.
Additionally, sales of existing homes plunged 5.9% in July, a sixth straight month of decline, a National Association of Realtors report noted. Existing home sales are down a hefty 20.2% from a year ago.
“We’re witnessing a housing recession in terms of declining home sales and homebuilding,” said NAR Chief Economist Lawrence Yun. “However, it’s not a recession in home prices. Inventory remains tight, and prices continue to rise nationally with nearly 40% of homes still commanding the full list price.”
Housing starts, which measure the annualized change in the number of new residential buildings that began construction, declined by 9.6% in July.
All of those data points indicate that the Fed’s rate hiking has knocked the housing market into a recession, which some economists fear could evolve into a broad-based recession for the entire U.S. economy.
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“Housing is going to lead,” Desmond Lachman, a senior fellow at the American Enterprise Institute, recently told the Washington Examiner of how a recessionary wave could play out. “People argue whether the economy is in recession or not, but everybody is accepting that housing is already in recession. So that’s what leads it. Because what it does is spools out from an industry like housing.”
The Fed is set to meet on Tuesday and Wednesday next week, when it will decide by how much to hike interest rates once again. Most investors are betting that it will raise rates by 75 basis points again, although some are now predicting a historic 100-basis-point increase.
