By Don DeBat

1-Sep-23 – The Federal Reserve’s effort to control inflation is turning the American Dream of homeownership into a nightmare.

On August 24, benchmark 30-year fixed-rate home loan interest charges hit a national average of 7.23 percent, the highest level in 22 years, reported Freddie Mac’s Primary Mortgage Market Survey. The rate jumped from 7.09 percent a week earlier. A year ago, lenders were charging an average of 5.55 percent.

It was the fifth consecutive week that the Freddie Mac national average rate rose, hitting its highest level since April 2002, when it averaged 7.13 percent.

“Last 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,” predicted Sam Khater, Freddie Mac’s Chief Economist. “As rates remain high and supply of unsold homes woefully low, incoming data shows that existing homes sales continue to fall.”

However, Khater optimistically said there are slightly more new homes available, and sales of these new units continue to rise, “helping provide modest relief to the unyielding housing inventory predicament.”

High inflation forced the Fed to raise its benchmark rate 11 times since March 2022, lifting the Fed funds rate to the highest level in 22 years.

Before August of this year, 30-year fixed-rate mortgages spiked to 7.08 percent on November 10, 2022, said Khater.

If the Fed continues to raise interest rates again to fight inflation, interest charges could go on a roller coaster ride for the balance of 2023. Veteran mortgage watchers predict home buyers soon could be paying 8 percent for a home loan.

Rates last floated in the lofty upper 7 percent bracket in 1999 and 2000, when many of today’s young home buyers were in diapers. In July 1999, borrowers paid 7.52 percent, while rates rose to 7.84 percent in December of that year. Rates skyrocketed to a whopping 8.23 percent in March 2000, but fell back to 7.54 percent in December of that year.

Mortgage rates don’t necessarily mirror the Fed’s rate increases, but tend to track the yield on the 10-year Treasury note.

“The economy continues to do better than expected and the 10-year Treasury yield has moved up, causing mortgage rates to climb,” said Khater (right). On August 24, the 10-year Treasury yield hit 4.24 percent, up from 4.20 percent.

Late last week, the yield on the 10-year Treasury note – which lenders use to price rates on mortgages and other loans – touched its highest level since October 2022, and it is inching closer to where it was in 2007.

Fifteen-year fixed mortgages averaged 6.55 percent on August 24, up from 6.46 percent a week earlier. A year ago, lenders were charging 4.85 percent for a 15-year fixed mortgage.

The Freddie Mac survey is focused on conventional, conforming, fully amortizing home purchase loans for borrowers who put 20 percent down and have excellent credit.

High rates can add hundreds of dollars a month in costs for borrowers, limiting how much they can afford to spend in a market already unaffordable to many Americans.