U.S. mortgage rates soared to the highest level in nine months this week following the surprise decision by Fitch Ratings to downgrade the nation’s credit score.
The Mortgage Bankers Association reported on Wednesday that the average rate on the 30-year loan climbed to 7.09% from 6.93% the previous week, the highest level since November 2022.
“Treasury yields rates rose last week and mortgage rates followed suit, due to a combination of the Treasury’s funding announcement and the downgrading of the U.S. government debt rating,” said Joel Kan, MBA’s deputy chief economist. “Rates increased for all loan types in our survey.”
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The steeper rates weighed heavily on mortgage demand, with a key measure of home-purchase applications tumbling 3.1% last week to the lowest level since February.
Demand for refinancing also continued to decline last week, sliding another 4%, according to the survey. Compared with the same time last year, refinance applications are down a stunning 37%.
“Not surprisingly, mortgage applications continued to decline given these higher rates, with overall application counts falling for the third consecutive week, as both purchase and refinance activity declined,” Kan said.
The interest rate-sensitive housing market has cooled rapidly in the wake of the Federal Reserve’s aggressive tightening campaign. Policymakers already lifted the benchmark federal funds rate 11 consecutive times as they try to crush stubborn inflation and slow the economy.
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The move by Fitch last week to cut its U.S. debt grade from the highest AAA rating to AA+ on concerns over the country’s bloated national debt has only exacerbated troubles within the housing market. The downgrade pushed the 10-year Treasury yield – which underpins mortgage rates – to the highest level in a year.
Not only are higher mortgage rates dampening consumer demand, they are limiting inventory.
That is because sellers who locked in a low mortgage rate before the pandemic began have been reluctant to sell with rates continuing to hover near a two-decade-high, leaving few options for eager would-be buyers.
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“The purchase index fell for the fourth consecutive week, as homebuyers continue to struggle with low for-sale inventory and elevated mortgage rates,” Kan added.
A recent report from Realtor.com showed that the number of available homes on the market in June was down more than 47% from the typical amount before the COVID-19 pandemic began in early 2020.