Mortgage rates hit their highest point since 2000

Mortgage rates jumped Monday, following a rise in bond yields driven by investors' concerns that high interest rates and inflation will linger longer than expected.

The average rate on the popular 30-year fixed mortgage hit 7.48%, the highest level since November 2000, according to Mortgage News Daily. It has risen 29 basis points in just the past week.

"Investors just aren't seeing the kind of deterioration in economic data that they expected," said Matthew Graham, chief operating officer of Mortgage News Daily.

He noted that the Federal Reserve wants to see the same deterioration before considering a policy shift, and that shift would likely favor short-term rates first.

"The net effect is that longer-term rates like 10-year Treasury yields and mortgages are bearing the brunt of the market's negative rate sentiment. This won't change until the data forces the Fed to start talking about the first rate cut."

Higher rates are hitting potential homebuyers hard, adding insult to the injury of Covid pandemic-inflated home prices. Rates set more than a dozen record lows in 2020, setting off a homebuying spree that caused prices to rise over 40% from the start of the pandemic to the summer of 2022. Prices pulled back slightly at the end of last year but are now increasing again due to still-strong demand and very lean supply.

Higher mortgage rates exacerbate the supply situation. Current homeowners are reluctant to list their homes for sale because the vast majority of them have rates around or below 3%. To move to another home would mean more than doubling that rate. It has created what is now being called "golden handcuffs" among potential sellers.

For a buyer today, the difference in affordability from just a year ago is dramatic. The average on the 30-year fixed last year at this time was around 5.5%. For someone buying a $400,000 home, with 20% down on a 30-year fixed loan, the monthly payment today, with principal and interest, is roughly $420 more than it would have been a year ago.

More borrowers are now opting for adjustable-rate loans, which offer lower interest rates for shorter fixed terms. The average rate on a 5-year ARM last week was 6.2%, according to the Mortgage Bankers Association. The ARM share of applications rose to 7%. In 2020, when the 30-year fixed was setting multiple record lows, that share was less than 2%.

The nation's homebuilders have been trying to offset higher mortgage rates by either buying down those rates for short or long terms, or by lowering home prices. They had slowed those incentives earlier this year, as demand surged and rates fell back, but they recently ramped them up again.

Homebuilder sentiment in August, however, dropped sharply, with builders citing higher interest rates as the main reason.