US Housing Market Faces Affordability Crisis Amid Skyrocketing Mortgage Rates

The U.S. housing market is grappling with its worst affordability crisis in nearly 40 years.

Mortgage rates have surged to a level unseen since April 2002, with the average rate for a 30-year fixed loan now standing at 7.09%, a significant rise from 6.96% just a week ago, as Freddie Mac reported in its latest Primary Mortgage Market Survey on Thursday.

Bloomberg noted how this sharp increase in borrowing costs, combined with soaring home prices due to a severe inventory deficit, has resulted in housing affordability plummeting to levels last observed in 1984, citing data from Black Knight Inc. BKI. The scarcity of available homes, rising expenses and economic concerns have deterred potential buyers, causing a dip in sales of pre-owned homes.

"Demand has been impacted by affordability headwinds, but low inventory remains the root cause of stalling home sales," Sam Khater, the chief economist at Freddie Mac, said.

Chart: US 30-Year Mortgage Rates Rise To Over 20-Year Highs

For perspective, monthly repayments on a $600,000 mortgage, considering the current 30-year average, would amount to approximately $4,028. This is a stark increase from $2,601 at the beginning of the previous year, prior to the Federal Reserve’s decision to begin the tightening cycle.

And we are not yet at the end of the tunnel. The latest Fed meeting minutes from July revealed concerns about “significant upside risks to inflation,” hinting at potential further rate hikes in the coming months, which could propel mortgage rates closer to the 8% mark.

Melissa Cohn, regional vice president at William Raveis Mortgage, told Bloomberg that some buyers, particularly those with lower credit scores and higher debt ratios, are receiving mortgage quotes around 8%. These borrowers are proceeding with the expectation of refinancing once rates drop in the forthcoming years.

Mark Zandi, the chief economist at Moody’s Analytics, told the publication that when interest rates climb beyond 7%, the market adopts an extremely cautious stance. This threshold renders housing predominantly unaffordable, potentially triggering declines in prices.

In related report released Thursday, Fitch Ratings spotlighted commercial real estate as a significant financial risk factor. The rating agency said: “US CRE continued to show signs of pressure with several large US mortgage REITs reducing new lending.”

The Real Estate Select Sector SPDR Fund XLRE has fallen 5% month-to-date, marking the worst monthly performance since February 2023, with 10 trading sessions remaining in the month.

This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

Photo: Shutterstock.

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