Interest rates on 30-year fixed-rate mortgages have hit yet another high, with lenders offering loans above 8% for the first time since 2000. Mortgage rates have gone up rapidly this year, rising two full percentage points from lows near 6% back in February.<\/p>\n
That\u2019s been brutal for home buyers, who have watched their buying power erode. At a 6% interest rate, a buyer looking to spend $2,000 a month on principal and interest could afford a loan of roughly $333,500. With interest rates at 8%, that same buyer can afford only $272,500. Their target home price has dropped $61,000 as more of that monthly payment has to go toward servicing interest.<\/p>\n
Here\u2019s why mortgage interest rates are so high, and why they could remain elevated. Still, there are ways that home buyers can contend with such a challenging housing market.<\/p>\n
A year ago, many housing economists, including in forecasts from Fannie Mae \u201cLast year around this time, the Fed was in the midst of hiking interest rates very rapidly,\u201d explains Chen Zhao, head of economic research at Redfin A recession could have forced the Federal Reserve to cut interest rates, with mortgage rates likely falling, too. But that recession hasn\u2019t arrived.<\/p>\n \u201cDespite what the Fed has done, hiking rates at the fastest rate ever, the economy, especially the job market, has really just remained very resilient. As a result, investors are now expecting that the economy is going to avoid a recession and remain very strong for longer,\u201d Zhao says. \u201cAnd that means that the economy can sustain higher mortgage rates for a longer amount of time.\u201d<\/p>\n See:<\/strong> These are the most expensive ZIP Codes in the U.S. for house shoppers<\/p>\n Looking at last year\u2019s predictions for 2023, it\u2019s clear that a lot can change in just a few months. With political upheaval in the U.S. and multiple wars overseas, there\u2019s potential for tectonic shifts in markets and in economic policy.<\/p>\n \u201cI would say that right now uncertainty is unusually high,\u201d Zhao comments. \u201cMaybe the most plausible forecast would be to say that rates are probably going to stay in this range for the near term or at least in the foreseeable future.\u201d But Zhao also outlines scenarios for mortgage rates going lower \u2014 an economic downturn forcing the Federal Reserve to encourage economic activity by easing interest rates \u2014 or higher, if mortgage spreads remain elevated.<\/p>\n The mortgage spread is the difference between the 30-year fixed mortgage rate and 10-year Treasury rate. \u201cHistorically, the spread between the 10-year Treasury and the 30-year mortgage rates is about 1 3\/4%,\u201d explains Melissa Cohn, New York-based regional vice president and mortgage banker at William Raveis Mortgage. Because of economic and geopolitical volatility, \u201cThose spreads have grown over the course of the past couple of years, and our mortgage rates are now trading at 3% or higher above the 10-year Treasury.\u201d<\/p>\n That said, it\u2019s also worth noting that while we haven\u2019t seen mortgage interest rates this high in 23 years, prevailing interest rates are in line with longer-term historical averages. Interest rates collected by government-sponsored enterprise Freddie Mac \u201cLooking holistically at the entire history, we\u2019re about where the average is,\u201d comments Jessica Lautz, deputy chief economist and vice president of research for the National Association of Realtors. Lautz points out that recent history is fairly exceptional: \u201cWe don\u2019t want to say that the interest rate of 18 is normal, but the interest rate of 2.5 is also not normal,\u201d she says, referring to historic highs of the early 1980s and the low point of 2020. \u201cBoth of those were very unusual time periods for interest rates.\u201d<\/p>\n Don\u2019t miss:<\/strong> A century-old real-estate practice could soon end. Here\u2019s how home sellers and buyers could be affected.<\/p>\n Higher interest rates have got\u00a0home buyers\u00a0scrambling to keep their budgets in line with costs. But buyers should also consider the wider effects that rates have on the housing market and how these could play out.<\/p>\n Cohn contends that those who can afford to buy now, despite high interest rates, are likely better off going ahead with a purchase, as home prices continue to rise. \u201cAre you better off buying in the higher-rate environment today and paying hundreds of dollars more a month in a mortgage payment so that you can refinance in a year when rates are down instead of having to pay 5% more on the purchase price of that home in a year?\u201d she asks. This argument assumes interest rates will drop, but it\u2019s also worth noting that while today\u2019s buyer waits for rates to fall, they\u2019re building equity.<\/p>\n Lautz also leans toward acting now if you can, but for different reasons. With housing inventory limited, a drop in interest rates could bring currently priced-out buyers off the sidelines, driving up home prices. \u201cI do think there is pent-up demand,\u201d Lautz explains, \u201cand so they may be facing a multiple-offer situation.\u201d In other words, lower rates could lead to the return of bidding wars.<\/p>\n Related:<\/strong> Some home sellers are offering to pay their buyers\u2019 mortgages. What\u2019s the catch with \u2018seller financing\u2019?<\/p>\n If you\u2019re in the position to buy a home despite today\u2019s mortgage rates, there are a few steps you can take to buffer the effects of high rates.<\/p>\n Get all the help you can:\u00a0<\/strong>If you\u2019re a first-time home buyer, look into state and local programs that provide down payment and closing cost assistance. These can be no- or low-interest loans or even outright grants. You may not even have to be a true first-timer: Many programs consider you a first-time home buyer if you haven\u2019t had an ownership interest in a home in at least three years.<\/p>\n
\n FNMA,
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\n and the Mortgage Bankers Association, were anticipating that\u00a0today\u2019s mortgage rates\u00a0would be in the 5%-6% range. Though that seems wildly off base now, at the time it looked pretty reasonable.<\/p>\n
\n RDFN,
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\n \u201cAnd most economic forecasters were really looking at this and saying, OK, this is most likely going to lead to a recession.\u201d<\/p>\nWhere are mortgage rates headed in 2024?<\/strong><\/h2>\n
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\n which go back to 1971, are widely used as the yardstick for mortgage interest rates. Over that half century, the average 30-year fixed interest rate has been 7.74%.<\/p>\nHow high rates might affect buyers\u2019 plans<\/strong><\/h2>\n
What home buyers can do now<\/strong><\/h2>\n