Mortgage rates shot up again last week as the bond market continues to grapple with a growing economy in the run up to the next Federal Open Market Committee meeting. 

Investors are concerned that the central bank will continue raising the funds rate, pushing borrowing costs even higher. “For many, there is worry that the Fed may overtighten on the monetary front and lead to economic damage,” said George Ratiu, chief economist at Keeping Current Matters.

Freddie Mac‘s Primary Mortgage Market Survey, which focuses on conventional and conforming loans with a 20% down payment, shows the 30-year fixed rate averaged 7.23% as of August 24, up from last week’s 7.09%. By contrast, the 30-year fixed-rate mortgage was at 5.55% a year ago at this time.

“This week, the 30-year fixed-rate mortgage reached its highest level since 2001 and indications of ongoing economic strength will likely continue to keep upward pressure on rates in the short-term,” said Sam Khater, Freddie Mac’s chief economist.

Other indices showed even higher mortgage rates.

HousingWire’s Mortgage Rates Center showed Optimal Blue’s 30-year fixed rate for conventional loans at 7.22% on Wednesday, compared to 7.18% the previous week. At Mortgage News Daily on Wednesday, the 30-year fixed rate for conventional loans was 7.36%, up 2 basis points from the previous week.

What does it mean for the housing market ?

Higher borrowing costs are part of today’s overall consumer experience: interest rates on credit cards, auto and personal loans, as well as mortgages, are higher. A strong economy still supports rising wages, allowing many households to mitigate the financial pressures.

However, persistently high mortgage rates pose a significant affordability challenge to buyers and sellers (not to mention the workers of a trillion dollar-plus industry). People adapt to the higher costs using different strategies, observed Ratiu. Some are leveraging high home equity levels, others downsize their budgets or ask their family for cash assistance. In July, 26% of existing homes sold to cash buyers while 7% of new homes sold to cash buyers.

For a majority of people, buying a home still means borrowing money. At today’s rate, the monthly cost to purchase a home totals about $2,400, not including property taxes and insurance, a 17% increase from a year ago.

Home sales have been tracking below last year’s levels and are also more than 20% below 2019 totals, noted Bright MLS Chief Economist Lisa Sturtevant. Higher mortgage rates probably signal “a further contraction in home sales activity,” she added. 

“We could see monthly sales fall to 2010 or 2011 levels when the market was recovering from the free fall after the housing bubble.”

However, the big difference between the financial crisis of 2008 is that the current higher-rate environment is not sending home prices down, and other factors have kept inventory close to historic lows. Therefore, sales activity will probably continue to slow in the fall but home prices should decrease only modestly and not homogeneously across all markets. 

The combination of high prices and high rates makes single family residential an unattractive investment option currently, said Charles Clinton, CEO at commercial real etate investment platform EquityMultiple. 

“This is exacerbated for investors pursuing short term rental strategies, where Airbnb hosts have seen a drop in average revenue,” he added.

What to expect with the Fed ?

When the Fed halted its rate hikes last June, many investors were hopeful that the Central Bank was close to declaring victory. Forecasts were for mortgage rates to begin to decline, perhaps falling to 6% by the end of the year. Now, however, as inflation ticked up, the labor market is still strong and bond yields are rising amidst economic uncertainty, optimism starts to wane.

“Instead of talking about rates falling to 6% this year, the question is how much above 7% are we going to go?” said Sturtevant.

However, the MBA still expects mortgage rates to fall off recent highs later this year. If that were true, it could bring some buyers back into the market, MBA President and CEO Bob Broeksmit said in a statement. 

Next week’s reading of the Personal Consumptions Expenditures Price Index will be another strong influence on the Fed’s decision in September.  

Additionally, former Federal Reserve Bank of St. Louis President James Bullard told Bloomberg Television that a pickup in economic activity this summer could delay plans for the Fed to wrap up interest-rate increases.