The rising interest rates and soaring home prices have created a challenging situation for potential homebuyers, as mortgage payments have become more expensive compared to last year. According to a recent report from Redfin.com, mortgage payments have increased by almost 20% in the past year. In the four weeks leading up to July 30, the average monthly mortgage payment in the United States was $2,605. Although this represents a 19% increase compared to the prior year, it is a slight decrease of $32 from July’s record high of $2,637. As of July 13, 2023, the 30-year fixed mortgage rate stood at 7.39%.
Speaking specifically about mortgage rates, the average 30-year mortgage rate as of August 8 is 6.81%. This is a slight increase from the previous week’s rate of 6.78% and a significant jump from the rate of 5.54% last year. Overall, the current rate is lower than the long-term average of 7.74%. Similarly, the 15-year mortgage rate is now at 6.25%, up from 6.11% the previous week and significantly higher than the rate of 4.58% last year. However, it is still lower than the long-term average of 5.20%.
In an effort to combat inflation, the Federal Reserve has been steadily raising the federal funds rate, which is a crucial overnight bank lending rate. This initiative began in March 2022 and aims to discourage spending as consumers face higher commercial interest rates, including mortgage rates. At their most recent meeting, the Fed decided to increase the federal funds rate by 25 basis points (0.25%), bringing it to a target range of 5.25% to 5.50%. This marks the 11th rate hike since March of the previous year, and there is a possibility of one more rate hike before the year comes to a close. However, a positive aspect of this situation is that when the federal funds rate rises, rates on high yield savings accounts and certificates of deposit (CDs) usually follow suit.
Turning our attention to monthly mortgage payments, the median home sale price in July was reported as $380,250, showing a year-over-year increase of 3.2%, which is the largest surge since November. Additionally, the total number of homes available for sale has decreased by 19%, which is the biggest drop in a year and a half. New listings have also taken a hit, decreasing by 21%. Homeowners with relatively low interest rates are reluctant to sell their homes and refinance at higher rates. In fact, a recent survey revealed that homeowners with mortgage rates above 5% are almost twice as likely to express their intention to sell their homes in the next three years compared to those paying rates below 5%. This supply-and-demand mismatch has contributed to the surging home prices we observe.