Mortgage rates jump higher, closing in on 7%

US mortgage rates climbed higher this week, inching closer to 7% and reaching their highest level since November.

The 30-year fixed-rate mortgage averaged 6.96% in the week ending July 13, up from 6.81% the week before, according to data from Freddie Mac released Thursday. A year ago, the 30-year fixed-rate was 5.51%.

The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit.

Mortgage rates have remained over 5% for all but one week during the past year and even went as high as 7.08%, last reached in November. Rates had been coming down and were under 6.5% for most of the spring. At the end of May, rates began to move higher as uncertainty around the debt ceiling standoff grew and interest rates remained elevated as economic data showed inflation was stickier than anticipated.

The inflation picture has been improving, with the Consumer Price Index easing for 12 consecutive months. It is now at its lowest level since March 2021, according to data released Wednesday.

“Incoming data suggest that inflation is softening, falling to its lowest annual rate in more than two years,” said Sam Khater, Freddie Mac’s chief economist. “However, increases in housing costs, which account for a large share of inflation, remain stubbornly high, mainly due to low inventory relative to demand.”

“Looking ahead, we may continue to expect the inflation slowdown as the growth in the shelter index, the largest contributor to inflation growth, passed its peak in April and has since been on a downward trend,” said Jiayi Xu, an economist at Realtor.com.

But, she said, while the improvement in inflation is encouraging, the level itself is still well above the Federal Reserve’s 2% target and the labor market remains robust.

“The strong job market will continue to drive demand in the economy, fuel price increases and contribute to higher inflation,” Xu said. “As a result, it is still highly likely that an additional rate hike will occur later in July.”

On the other hand, she said, the encouraging inflation data could be used as the basis for another pause in hikes, a “wait-and-see” approach, at the upcoming Fed meeting, which may help reverse the recent rise in mortgage rates.

“This, in turn, would create a more favorable environment for those looking to purchase a home in the coming fall season,” Xu said.

Strong labor market encourages some buyers

Even as the average mortgage rate pushed toward 7%, reaching its highest level this year last week, mortgage applications still ticked up a bit, according to the Mortgage Bankers Association.

“The increase was led by small gains in FHA and VA purchase applications,” said Bob Broeksmit, MBA president and CEO. “MBA still expects mortgage rates to decline to around 6% by the end of the year, which should bring more buyers into the market.”

One reason why some buyers are forging ahead regardless of higher rates is the strong job market.

“Positive labor market data indicates that households continue to be in a good economic position and can approach various purchases, including housing, with some confidence,” said Xu.

But the cost of buying a home is still incredibly high for many. Elevated mortgage rates and still-high housing prices continue to present significant affordability challenges for home buyers, slowing home purchases and putting pressures on home and rental prices, she said.

“While both buyers and sellers have pulled back their activities from the pandemic-era frenzy, buyers have adapted more quickly to the higher mortgage rate environment as we started to see a declining number of homes for sale on a yearly basis starting in late June,” said Xu.

That low supply of homes on the market is not expected to change much for now, she said.

“We expect the existing home-for-sale inventory will experience a modest drop of 5% for the year as a whole,” said Xu. “Fortunately for buyers, new homes remain an option, as builders are continuing to add homes with a somewhat greater focus on affordable price points.”