Mortgage rates rise on higher inflation, dimmed rate cut hopes
The average rate on a 30-year loan continues to hover around 7%.
Mortgage rates surged this week with homebuyers retreating from the housing market — taking with them hopes of the Fed cutting rates by the spring buying season as inflation remains higher than expected.
The average mortgage rate for a 30-year fixed loan surged past 7% from 6.97% a week prior and peaked at 7.13% on Feb. 13, according to the Mortgage News Daily index. Rates have been increasing over the last seven days, settling at 7.03% on Thursday.
A separate tracker showed a similar week-over-week rise in borrowing costs, with the average 30-year mortgage rate climbing to 6.77% from 6.64% a week prior, according to Freddie Mac's latest release.
Read more: Mortgage rates hover around 7% — is this a good time to buy a house?
Borrowing costs are proving stubbornly high, even as the economy remains robust, with inflation hitting above economists' expectations in January. The US Consumer Price Index (CPI) gained another 0.3% month over month and grew 3.1% annually, according to data from the Bureau of Labor Statistics released on Tuesday. Economists surveyed by Bloomberg forecasted decelerated monthly growth of 0.2% and an annual gain of 2.9%.
Taken together, it suggests the Federal Reserve's fight with inflation will last longer than previously thought, an unhopeful sign for homebuying affordability.
"Rate cuts that the market expected in the first half of this year may simply not materialize because strong January economic data raised the risk that disinflation could be stalling," said Orphe Divounguy, a senior economist at Zillow.
Renting is cheaper than paying a mortgage, but barely
Homebuyers retreated from the market as they waited for the promise of cuts yet to come. The volume of mortgage applications dropped more than 2% from one week earlier, according to the Mortgage Bankers Association (MBA) for the week ending Feb. 9.
The purchase activity portion of the index showed a weekly decrease of 3% and remained 12% lower than the same week one year ago.
"Purchase applications remained subdued as elevated rates continue to add to affordability challenges along with still-low existing housing inventory," said Joel Kan, MBA's vice president and deputy chief economist.
Buyers are also staying away from the housing market for another reason: Renting may be cheaper than buying in most of the nation.
According to a recent study by LendingTree, rent was cheaper than owning a house with a mortgage in each of the nation's 50 largest metros in 2022. And the price difference between the two was nearly $570 per month on a median-priced home.
"When mortgage rates rise as much as they have over the last few years, buying becomes considerably more expensive. Owing to this, many would-be buyers have unfortunately been priced out of the buying market and had no other option but to turn to renting," Jacob Channel, LendingTree's senior economist, told Yahoo Finance.
Average national rent has also been increasing. The median US asking rent rose 1.1% on a year-over-year basis in January to $1,964, Redfin’s rental tracker reported. While rental growth over the last 12 months has flattened, prices have surged since the pandemic — rising almost 20% since January 2020.
"Unfortunately, like homebuying costs, the cost of renting is definitely increasing in many places. This means that even if you end up renting, you’re still likely to pay a significant amount of money for housing," Channel said.
San Jose, Calif., San Francisco, and New York are the cities with the biggest spread between owning and renting: nearly $1,350, with mortgages ranging between $3,000 and $4,000 and rents falling between $1,700 and $2,600.
Top cities with similar costs between owning and renting are Phoenix, Orlando, Jacksonville, Fla., and Atlanta. The cost spread in these metropolitan areas falls just $87 to $216.
"Remember, there’s absolutely nothing wrong with renting and there are plenty of instances where doing so is going to make more sense than buying will," Channel reminded sidelined homebuyers. "Even if your goal is to one day own your own home, that doesn’t mean you should totally empty your bank account or try to buy an unsafe or otherwise uninhabitable house."
Rebecca Chen is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).
Read the latest financial and business news from Yahoo Finance