The interest rate on 30-year mortgages rose last week to an eight-month high, extending an upward trend that’s squeezing would-be homebuyers already facing rising house prices and limited supply.
The average rate on the most popular home loan reached 7.09% for the week ending Jan. 16 — the highest level since May, according to a report released Thursday by Freddie Mac.
The higher mortgage rates add to the financial strain on prospective homebuyers who must already contend with record-high home prices, limited supply and rising insurance premiums in some parts of the country.
While buying a home is becoming increasingly cost-prohibitive, renting is also taking a bigger bite out of people’s budgets.
The national median rent in the US reached $2,000 a month, according to the latest data from online realtor site Zillow.
The rate at which rent has shot up has outpaced wage growth, intensifying affordability challenges for many renters nationwide.
Shelter is considered a main driver of persistently high levels of inflation — much to the dismay of the Federal Reserve, which has sought to combat the rate of price hikes by keeping interest rates high.
The Consumer Price Index rose 0.4% last month after climbing 0.3% in November — with the inflated cost of housing fueling part of the increase, the Labor Department’s Bureau of Labor Statistics said on Wednesday.
High borrowing costs, coupled with limited housing inventory, are compounding difficulties for prospective buyers.
Many economists expect mortgage rates to stay above 6% through 2026, meaning relief for homebuyers may still be years away.
Sam Khater, Freddie Mac’s chief economist, told CNN that the robust labor market has kept inflation high — thus contributing to rising mortgage rates.
He advised buyers to seek multiple lender quotes to find more favorable rates, but acknowledged that the current conditions make homeownership increasingly unattainable for many Americans.
Limited supply continues to be another key factor making it more expensive to own a home.
Freddie Mac recently estimated a deficit of 3.7 million units nationwide.
During Thursday’s confirmation hearing on Capitol Hill, Scott Bessent, President-elect Donald Trump’s nominee for Treasury secretary, emphasized the severity of the crisis.
“We have an affordability crisis, a housing shortage, and for the first time in my lifetime, parents feel the American dream is slipping away from their children,” Bessent said.
Despite the challenges, there have been some positive developments.
The National Association of Realtors (NAR) reported a 17.7% increase in total housing inventory from the previous year, reaching 1.33 million units by the end of November 2024.
Some homeowners who had secured low mortgage rates before the Fed began raising interest rates in 2022 are now selling, despite facing higher rates on their next purchase.
This shift has contributed to the slight increase in available homes.
But economists warn that the so-called “lock-in effect,” where homeowners hesitate to sell due to significantly higher mortgage rates, is unlikely to disappear quickly.