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US home mortgage rates jump by the most since 1987

US mortgage rates have surged by the most in 35 years as inflation soars and interest rates rise, threatening to leave many first-time homebuyers on the sidelines.

The average interest rate on a 30-year fixed rate mortgage jumped by more than half a percentage point to 5.78 per cent, the highest level since November 2008, according to mortgage provider Freddie Mac.

The weekly increase was the sharpest since 1987. The rate was 3.2 per cent at the start of the year, while a year ago, before the Federal Reserve embarked on an aggressive campaign to raise interest rates, the 30-year fixed rate mortgage averaged 2.93 per cent.

Line chart of  showing Average rate on a 30-year fixed rate mortgage jumps to the highest level since  2008

The rapid acceleration has threatened to cool a strong housing market, as Americans — many working from home during the coronavirus pandemic — took advantage of lower mortgage rates to buy housing, in the process driving prices to record highs.

But the recent rise in mortgage rates has threatened affordability for new homebuyers, slowing housing demand.

“The average homebuyer today now faces higher mortgage repayments as a share of their income than last seen at the peak of the mid-2000s boom,” said Matthew Pointon, senior property economist at Capital Economics. “With cautious lenders not set to loosen mortgage lending standards, that will shut many potential buyers out of the market. Indeed, the first-time buyer share has recently dropped to 13-year lows.”

Homebuyers stunned by the rapid climb in mortgage rates can look to the Federal Reserve’s efforts to tame US inflation that reached a fresh 40-year high last month, as well as rising inflation expectations, which suggest Americans are becoming more concerned about the outlook and their finances. The Fed on Wednesday raised its benchmark rate by 0.75 percentage points, the largest increase since 1994.

“These higher rates are the result of a shift in expectations about inflation and the course of monetary policy,” said 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.”

Moderation is already starting to show up in the data: the rate of US new home construction fell in May to the slowest pace since April 2021.

US housing starts fell 14.4 per cent month on month to an annualised pace of 1.5mn, according to the commerce department. Building permits, considered a leading indicator of the housing market, fell 7 per cent from the previous month to an annualised pace of 1.69mn.

Sentiment among homebuilders declined for the sixth consecutive month in June, as inflation and higher mortgage rates weakened demand for new homes.

Sellers have also started to take note, with Redfin on Thursday reporting that the number of for sale homes with price drops reached a record 22. 4 per cent in the four weeks that ended June 12.

The recent jump in mortgage rates was calculated before the Federal Reserve’s rate-setting meeting this week. Fed officials have signalled the policy rate could rise well above 3 per cent by year end.

“Mortgage rates tend to get priced off the 10-year [Treasury note] yield for fixed-rate mortgages,” said Joshua Shapiro, chief US economist at MFR. “Mortgage rates will probably rise further, but I think we’ve seen the bulk of the increase.”

Still, high interest rates will slow economic growth, which will impact consumer spending, leading to a decrease in home sales. Nancy Vanden Houten, lead economist at Oxford Economics, said there is a chance that long-term interest rates could steady.

“If the Fed’s aggressive stance leads to a slowing in economic growth and inflation, long-term interest rates may stabilise,” said Vanden Houten. “Or start to decline even as the Fed continues to raise short-term rates.”

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