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Mortgage rates surged to a 23-year high this week, landing another blow on the housing market.
The rate on the average 30-year fixed mortgage increased to 7.31% from 7.19% the week prior, according to Freddie Mac. That’s the highest rate since mid-December 2000, when it averaged 7.42%.
Rates tracked the 10-year Treasury yield, which spiked to its highest point since 2007 on Wednesday as concerns over a potential US government shutdown grew stronger. The development also comes a week after the Federal Reserve suggested that it would keep its benchmark interest rate higher for longer.
Read more: Mortgage rates at over 20-year high: Is 2023 a good time to buy a house?
For homebuyers, the uptick in rates again eroded their purchasing power and offered a good reason to stick to the sidelines. Meanwhile, those still on the hunt may face even higher rates down the road.
"Are higher rates causing a significant impact on buyers? The answer is yes," Jason Sharon, owner of Home Loans Inc., told Yahoo Finance. "Will it kill the housing market? Absolutely not. However, it is pumping hard on the brakes."
'Fewer buyers in the market'
Elevated rates continued to hammer purchasing demand.
The volume of purchase applications for a mortgage fell 2% from one week earlier on a seasonally adjusted basis, the Mortgage Bankers Association (MBA) survey for the week ending Sept. 22 found. Overall, purchase demand was 27% lower than the same week a year ago.
"Presently, there are fewer buyers actively searching for homes, leading to reduced competition," Beatrice de Jong, real estate broker at The Beverly Hills Estates, told Yahoo Finance.
In fact, inventory is growing because so many buyers have left the market, Mike Simonsen, CEO of Altos Research, wrote in his weekly analysis, an unusual occurrence during this time of the year. But new listings are "still running 9-10% fewer homes for sale each week than last year," he wrote.
Read more: How to buy a house in 2023
That’s because many homeowners are reluctant to sell their homes and lose their current mortgage rate, which is far lower than the prevailing one.
"Eighty percent of homeowners with a mortgage have a mortgage rate below 5%," Orphe Divounguy, senior economist at Zillow, told Yahoo Finance. "These homeowners have little incentive to sell, trading in their low monthly housing costs for the much higher housing costs that they would face as a buyer in today’s mortgage rate environment."
That supply-demand dynamic is evident in the latest sales data. New home sales faltered in August. Pending home sales — an indicator of future closed sales — slumped during the month, while closed sales of previously owned homes dropped to a seven-month low.