Fed's Latest Victim: US Mortgage Rates Hit 20-Year High

Real estate is a major driver of the US economy, accounting for 17% of its gross domestic product (GDP). Private home ownership has long served as the gateway to the middle class for working Americans, leading to the proliferation of suburban sprawls outside cities. But in the 21st century, new attention has come to urban investments, too.

Freddie Mac, the state-chartered mortgage aggregator, announced on Thursday that 30-year fixed-rate mortgages had hit their highest point in more than 20 years. The trend has put a damper on home sales and highlighted one of the many risks associated with the Federal Reserve’s response to inflation.

“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,” Sam Khater, Freddie Mac’s chief economist, said in a news release.

“As rates remain high and supply of unsold homes woefully low, incoming data shows that existing homes sales continue to fall. However, there are slightly more new homes available, and sales of these new homes continue to rise, helping provide modest relief to the unyielding housing inventory predicament,” Khater added.

The firm noted that on Thursday, the average interest rate for a 30-year fixed-rate mortgage was 7.23%, up from 7.09% just a week prior and 5.55% at this time last year. A 15-year fixed-rate mortgage averaged at 6.55% on Thursday, up from 6.46% a week ago and 4.85% a year ago, Freddie Mac said.

The last time mortgage rates were this high was in June 2001. The result is that fewer Americans are buying or selling homes, especially first-time buyers. Recent data from the National Association of Realtors shows that home sales had fallen by 16.6% in July 2023 as compared to the same month last year. There’s little surprise as to why, either: home prices are at their highest in 40 years.

The high rates have come as the yield on a 10-year US Treasury bond, widely considered the benchmark for other interest rates, sits at a 16-year high.

However, the yield on 2-year Treasury bonds is even higher - an unusual gap called an “inverted yield curve” that suggests investors expect a recession within a year’s time.

The cause of both is the same: the Federal Reserve’s effective federal funds rate, which sits at a 22-year high amid the central bank’s efforts to clamp down on inflation. The interest rate restricts how much banks can lend to each other overnight, which puts a damper on borrowing and slows down investment. The gamble is that doing so stops the currency from depreciating before it stops the economy from working and plunges it into a recession.

“Earlier this year, it looked as though inflation was being brought under control and the Fed may be almost ready to declare victory… now, however, as inflation has ticked up and bond yields are rising amidst economic uncertainty, it is a different situation,” Lisa Sturtevant, chief economist at Bright MLS, said in a statement.

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

Despite the high interest rates - which could still go higher, thanks to new economic troubles in recent weeks - economic forecasters at the Fed and in private banking institutions alike have softened their previously-dire expectations for the US economy in the coming months.