Mortgage rates go flying with the highest jump since 1987 — and still housing prices may keep on rising

U.S. mortgage rates jumped more than half a percentage point this week, an increase not seen in decades and one sure to price even more Americans out of the housing market.

The surge in rates comes amid a turbulent week in the economy, which has been slammed by a stock market correction, unexpectedly high inflation readings and an unusually large interest rate hike from the Federal Reserve.

For buyers looking to finance a home purchase with a 30-year mortgage, the math has changed.

“If buyers want to pay the same monthly mortgage payment as at the beginning of the year when rates were about 2.5 percentage points lower, they will need to look for a lower-priced home,” writes Nadia Evangelou, senior economist with the National Association of Realtors.

“Specifically, buyers can afford to buy 25% less expensive homes than at the beginning of the year.”

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30-year fixed-rate mortgages

The interest rate on a 30-year fixed mortgage averaged 5.78% this week, up from 5.23% — the largest one-week increase since 1987, mortgage finance giant Freddie Mac reported on Thursday.

A year ago, the 30-year rate was just 2.93%.

“These higher rates are the result of a shift in expectations about inflation and the course of monetary policy,” says Sam Khater, Freddie Mac’s chief economist.

“Higher mortgage rates will lead to moderation from the blistering pace of housing activity that we have experienced coming out of the pandemic, ultimately resulting in a more balanced housing market.”

Yet the market remains remarkably tight. If you’re shopping for a house, you probably haven’t seen prices come down much — if at all.

“Prices might keep going up for a while, even in a world when rates are up,” Federal Reserve Chair Jerome Powell said this week after announcing a three-quarter-percentage-point hike to the federal funds rate.

Buyers, he said, need the market to “reset.”

“We need to get back to a place where supply and demand are back together and where inflation’s down low again and mortgage rates are low again,” Powell said.

15-year fixed-rate mortgages

The rate on a 15-year mortgage averaged 4.81% this week, up from 4.38% last week, Freddie Mac says. A year ago at this time, the 15-year loan was averaging 2.24%.

Today’s mortgage rates — which haven’t been this high since 2008 —are cutting deeply into the budgets of home shoppers.

Before financing a purchase, prospective buyers need to “run the numbers” through a mortgage calculator, says Lawrence Yun, chief economist with the National Association of Realtors.

“What may have been $2,000 per month in a mortgage payment, for the same house, the number could be $2,900 today,” Yun said on CNBC.

5-year adjustable-rate mortgages

The interest rate on a five-year adjustable-rate mortgage (ARM), is averaging 4.33%, up from 4.12% last week.

Last year at this time, the 5-year ARM averaged 2.52%.

Interest rates on ARMs adjust in tune with the prime rate. Interest costs start off low but can increase sharply once the initial fixed-rate period is over.

Because of their lower initial rates, ARMs can make sense for people who might not be planning to own their homes long.

If rates were to fall in the future, an ARM borrower could always refinance into a longer-term loan with a more desirable rate.

The pain of higher mortgage rates is spreading

Homebuyers aren’t the only ones affected.

Rising home prices have led to an even hotter rental market, with would-be tenants engaging in bidding wars of their own.

“People showing up are scrambling to get those properties,” Yun says.

Builder stocks are being hammered over low construction numbers — the annual rate of housing starts fell 14.4% in May — and real estate companies are cutting employees.

“With May demand 17% below expectations, we don’t have enough work for our agents and support staff,” Redfin CEO Glenn Kelman wrote to employees this week.

“We could be facing years, not months, of fewer home sales.”

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.