US homebuyers in trouble as mortgage interest rates reach record level since 2002

Homeownership aspirations in the US are facing a considerable hurdle as mortgage interest rates have surged to their highest point since 2002.

The average interest rate for a 30-year fixed-rate home loan has now reached 7.09%, marking a stark contrast from just a couple of years ago. The abrupt increase in rates is a direct result of the Federal Reserve's aggressive moves to curb inflation by raising interest rates. 

In a span of two years, mortgage interest rates have more than doubled, significantly amplifying the financial burden for prospective homebuyers. For instance, the monthly payment on a $350,000 home, assuming a 20% down payment, has escalated to $1,880, compared to the considerably lower $1,159 in 2021 when interest rates remained below 3%.

Robert Dietz, the Chief Economist of the National Association of Home Builders, voiced concern, saying, "A lot of buyers have been priced out. If you don't have access to substantial parental financial support for a down payment, the road to homeownership becomes exceedingly challenging."

Notably, the ramifications of the escalating interest rates extend beyond potential first-time buyers. Existing homeowners are also hesitating to sell and upgrade their homes due to the prospect of higher mortgage interest rates. Dietz further explained, "Homeowners with existing 2% or 3% mortgages are in no rush to list their homes, given the potential for higher mortgage costs. This has led to a staggering 50% reduction in resale inventory compared to anticipated levels."

The National Association of Realtors' Chief Economist, Lawrence Yun, echoes these concerns, stating that the limited number of homes available for sale has led to a considerable drop in home sales. In June alone, sales of existing homes plummeted by 18.9% compared to the previous year.

The surge in mortgage interest rates closely correlates with the upward trajectory of the 10-year Treasury yield, which has also witnessed a recent ascent. This rise is attributed to growing expectations that the Federal Reserve will persist in maintaining higher interest rates in its bid to rein in inflation. The 10-year yield hit 4.3%, just a day after the release of the minutes from the latest Federal Reserve meeting.

As homebuyers grapple with the new reality of elevated mortgage rates, the housing market's future remains uncertain, raising questions about its resilience in the face of mounting financial challenges.