Mortgage Rates Are Back Near 7% After the Fed's First Rate Hike in Three Years

Mortgage Rates Are Back Near 7% After the Fed's First Rate Hike in Three Years

Mortgage rates moved sharply higher last week, but not for the reason many consumers assume.

Freddie Mac reported that its average 30-year fixed mortgage reached 6.95% on September 17, up from 6.76% one week earlier. The 15-year fixed increased from 6.09% to 6.26%.

One day earlier, the Federal Reserve raised its target range for the federal funds rate by 0.25 percentage point to 3.75%–4.00%, its first increase in three years.

It would be easy to connect those two events and conclude that the Fed increased mortgage rates.

That's not what happened.

Mortgage rates moved before the Fed

Mortgage rates are heavily influenced by longer-term bond markets.

Those markets continuously price expectations about inflation, economic growth and future Federal Reserve policy.

By the time the Fed announced Wednesday's increase, investors largely expected it.

That's why mortgage rates barely moved immediately after the announcement.

Much of the increase had already happened.

Why did rates increase?

Inflation remains above the Federal Reserve's target.

August CPI increased 3.4% year-over-year, while core CPI increased 2.4%. Producer prices increased even faster, rising 5.4% over the past year.

The Fed's September statement explicitly noted that inflation remains elevated while economic activity continues expanding at a solid pace.

That combination has kept upward pressure on longer-term interest rates.

Housing is slowing

Higher borrowing costs are clearly affecting housing activity.

Existing-home sales declined 2.0% in August to a seasonally adjusted annual rate of 3.98 million.

Available inventory increased to 1.62 million homes, representing 4.9 months of supply.

The median existing-home price was $429,100, still 1.6% higher than one year earlier.

New construction is also sending mixed signals.

Overall housing starts declined 2.6% in August, although single-family starts increased 7.6%. Single-family building permits declined 1.8%.

Meanwhile, builder sentiment fell to its lowest level in a year, with 38% of surveyed builders reporting price reductions and more using sales incentives.

What does this mean for buyers?

A nearly 7% mortgage rate isn't good news for affordability.

But slower sales and increasing inventory can also create negotiating opportunities.

Buyers should evaluate the entire transaction:

• Purchase price.

• Seller concessions.

• Builder incentives.

• Closing costs.

• Loan structure.

• Cash reserves.

And the cost of obtaining a lower interest rate.

The goal isn't to perfectly predict when mortgage rates will decline.

It's to determine whether today's transaction makes financial sense with today's numbers.