Why are mortgage rates so high?

According to Bankrate data, the average 30-year fixed mortgage rate reached 8% on Thursday, a level not seen since 2000.

The 30-year rate has been on the verge of 8% for several weeks, then backed off, then picked up steam again — a perplexing pattern that is somewhat unusual for this time of year, when home sales and mortgage activity begin to slow.

Why are mortgage rates so high?

Several factors have contributed to the 30-year rate’s march toward 8%:

—The 10-year Treasury yield: Fixed-rate mortgage rates are linked to the 10-year Treasury yield. Mortgage rates rise in lockstep with this bond yield. Higher yields, in general, indicate increased confidence in the economy. If investors anticipate trouble, they will buy lower-risk Treasurys, lowering yields and, as a result, fixed mortgage rates. Against that grain, the yield has risen rapidly recently, approaching 5% as of Oct. 19, owing in part to economic uncertainty and the Israel-Hamas conflict.

—The Federal Reserve: The Federal Reserve establishes the federal funds rate, which is the rate at which banks lend to one another overnight in order to meet Fed reserve requirements. Although this rate is not directly related to the 30-year mortgage, when the Fed raises it, borrowing costs rise across the board. For some time, the central bank has been raising this rate in order to control inflation.

—Inflation: Mortgage rates can be influenced by inflation, which has recently been on the rise. When inflation is too high, investors demand higher bond yields, putting downward pressure on mortgage pricing. (Your lender, on the other hand, may price loans lower in order to attract borrowers who are dealing with increased expenses.) The September Consumer Price Index was 3.7%, which was higher than the Federal Reserve’s target of 2%.

The interaction of these factors has resulted in a rise in the 10-year Treasury, as well as mortgage rates reaching 23-year highs.

“When global events are uncertain and tumultuous, as they are in the Middle East,” says James Sahnger of Jupiter, Florida-based C2 Financial Corporation, “money flows into bonds and rates benefit.” “Today, however, inflation shows no signs of abating, and Washington’s continued excess spending isn’t helping.” We will need to see sustained declines in economic data for rates to begin to fall.”

Of course, depending on factors such as credit score and finances, location, and loan type, some borrowers were already receiving rates above 8%. Bank of America, Pennymac, Rocket Mortgage, and others were advertising APRs higher than 8%, with some even exceeding 8.5%, as of Thursday morning.

According to Fannie Mae’s Home Purchase Sentiment Index, the No. 1 reason Americans are delaying home purchases is high mortgage rates, not high home prices.

Indeed, many homeowners aren’t selling because they’re locked in at lower rates, and many buyers aren’t buying because of higher rates and prices, which are exacerbated by a lack of market options.

According to the National Association of Realtors (NAR), home sales were down 2% year on year in September.

“Limited inventory and low housing affordability continue to stymie home sales, as they have all year,” says Lawrence Yun, NAR chief economist. “The Federal Reserve simply cannot keep raising interest rates in light of softening inflation and weakening job gains.”

Have mortgage rates reached their all-time high?

In the last two years, the average monthly payment on a 30-year mortgage has risen significantly. While home prices have been out of reach for many for some time, mortgage rates only began to rise in 2022, after a period of record low rates during the pandemic.

Based on the most recent reported median home price, the average monthly payment has increased to $2,806 — a 91% increase over 2021.

Is 8%, however, the upper limit? Some forecasters predict that interest rates will fall by the end of the year. The Mortgage Bankers Association now forecasts a 30-year rate of 7.2%, up from a 6.6% estimate a month ago. According to Fannie Mae, the rate will be 7.3%.

“I never call tops or bottoms except to say that if we haven’t seen the top, we are very close to it,” Joel Naroff, president of Naroff Economics in New Jersey, says.

“Rates will eventually come down, but I don’t see it happening without some serious Fed intervention,” says Sean Salter, an associate professor of finance at Middle Tennessee State University. “Rates will continue to rise until there’s a significant reason to change the market’s mind.”