Last week, U.S. mortgage interest rates rose to their highest levels since July 2007 during the Great Recession.

The average rate for a 30-year, fixed-rate loan climbed to 6.7 percent by Thursday last week, rising from 6.29 percent the week before, according to the Federal Home Loan Mortgage Corporation’s (Freddie Mac’s) survey of lenders.

It was the sixth consecutive week of rising rates, which now have more than doubled the level of about 3 percent where they began this year.

Rates have risen with the U.S. Federal Reserve’s key federal funds interest rate, which the central bank has hiked relentlessly since last spring in a so-far vain attempt to control inflation.

Usually, mortgage rates are more closely tied to the yield on the 10-year treasury note, which bounced wildly last week in the wake of the U.K.’s financial crisis. (See “U.K.’s Debt Bomb Roils Bond Markets in Europe, U.S.” in this issue.)

The bond market’s gyrations account for a wider-than-usual disparity among rates offered by different lenders, according to Sam Khater, Freddie Mac’s chief economist.

TREND FORECAST: As we had forecast, higher rates would deflate the housing market that was artificially pumped up by cheap mortgage rates. Now buyers can’t afford to pay more as a result of higher mortgage rates and many owners who were planning to sell the home they own to buy another one are hesitating because of far higher rates.

Many potential buyers will continue renting, shut out of the home-buying market by the combination of rising interest rates and stubbornly high home prices. 

By the end of August, sales of existing homes had fallen for seven consecutive months.

Applications to refinance existing mortgages have plunged 85 percent, year over year, according to the Mortgage Bankers Association (MBA).

The cratering market in refinancing will drag mortgage loans in general down by 48 percent compared to last year, the MBA predicted.

PUBLISHER’S NOTE: In articles such as our “U.S. Market Overview” (28 Sep 2021) and “Community Bankers: Housing Crash Coming?” (19 Oct 2021), we have correctly been forecasting for more than a year that when the U.S. Federal Reserve raised its fed funds rate to or above 1.5 percent, the housing market would begin a deep slump.

The market crashed first for modest-and middle-income households, as fewer were able to afford down payments or qualify for mortgages at higher interest rates.

The figures prove the point: the percentage of homes sold to first-time buyers has been steadily slipping in recent months. Historically, those buyers make up 40 percent of the market; by February of this year, they comprised just 29 percent.

Therefore, the higher interest rates rise, the deeper the housing market will decline.