Mortgage rates jumped to a 21-year high this week, climbing back above 7% and making it even harder for buyers to afford homes in an already difficult market.
The average 30-year fixed-rate mortgage -- the most popular home loan in the United States -- was 7.09%, up from 6.96% last week, Freddie Mac said Thursday. A year earlier, the 30-year rate was 5.13%.
The current rate is the highest since April 2002. In the intervening period, homebuyers enjoyed years of falling rates, which even dipped below 3% at the beginning of the pandemic.
But as rates abruptly surged, the housing market has been mired, as owners are unwilling to put their homes on the market because they feel locked in by the low rates on their existing mortgages.
Higher rates can add hundreds of dollars a month in costs for borrowers, limiting how much they can afford in a market already unaffordable to many Americans.
"With prices even higher than they were a year ago in many markets, crossing the 7% mortgage rate threshold again could be what sets in motion a major contraction in the housing market this fall," said Lisa Sturtevant, chief economist for Bright MLS.
The latest increase in rates follows a sharp uptick in the 10-year Treasury yield, which has been above 4% this month and climbing. The yield, which lenders use to price rates on mortgages and other loans, touched its highest level since October on Thursday morning, and it's close to where it was in 2007.
The yield has been rising as bond traders react to more reports showing the U.S. economy remains remarkably resilient, which could keep upward pressure on inflation, giving the Federal Reserve reason to keep interest rates higher for longer.
"The economy continues to do better than expected and the 10-year Treasury yield has moved up, causing mortgage rates to climb," said Sam Khater, Freddie Mac's chief economist. "Demand has been impacted by affordability headwinds, but low inventory remains the root cause of stalling home sales."
In June, sales of previously owned homes fell nearly 19% from the year before, according to the National Association of Realtors. The median price of an existing home was $410,200 in June, the second-highest mark since the organization began tracking the data in 1999, down only marginally from a high of $413,800 a year ago.
"The new reality has jolted the housing market: Home sales have fallen sharply since 2021, and homeowners, reluctant to give up their super-low mortgage rates, are staying put," Jeff Ostrowski, an analyst at the personal finance company Bankrate, wrote in a note. "Housing affordability has emerged as a persistent challenge."
The lack of existing homes has pushed buyers to consider new construction. The sale of new homes climbed nearly 24% in June from the same period a year earlier, the Census Bureau reported. Housing starts, a measure of the construction of new homes, increased about 6% in July from the previous year.
But for homebuyers, finding affordable options remains difficult. The Fed has lifted its policy interest rate, which underpins borrowing costs across the economy, to the highest level in 22 years as it tries to cool the economy and slow stubbornly high inflation.
Officials at the central bank have forecast one more rate increase this year. They expect to cut rates next year, but they think it could be several years before rates return to the lower levels that were common before the pandemic.
Mortgage rates generally track the yield on 10-year Treasury bonds, which are influenced by a variety of factors, including expectations around inflation, the Fed's actions and how investors react to all of it. On Thursday, the 10-year yield rose above 4.3% for the first time since 2007.
Information for this article was contributed by Gregory Schmidt of The New York Times and by Alex Veiga and Maatt Ott of The Associated Press.