Mortgage rates in the US increased to their highest level in nearly 14 years, leading to a further decline in the already weakened demand for mortgages. According to Freddie Mac, the 30-year fixed-rate mortgage average rose to 5.89% in the week ending September 8, 2022, up from 5.66% in the previous week.
Fed’s Tight Monetary Policy
The Federal Reserve has been raising interest rates in an effort to keep inflation under control, which increased borrowing prices elsewhere. The Fed increased its benchmark short-term interest rate four times in 2022. The central bank will likely need to maintain interest rates at levels high enough to impede the economy for some time to control the worst inflation in 40 years. Although the Fed’s benchmark rate does not directly determine mortgage interest rates, its activities have an impact on these rates. Mortgage rates often follow the 10-year US Treasury bond market, which tends to fluctuate with Fed’s benchmark rate.
Impact on Households
Higher interest rates put off prospective house buyers, affecting cities such as New York. Prices are affected by weakening demand, with the average house in the US selling for less than its asking price for the first time in almost 18 months. The record low-interest rates during the COVID-19 pandemic era resulted in a boom in the mortgage industry, with many businesses expanding quickly by refinancing consumer loans with cheaper interest rates. However, increasing interest rates significantly hampered the industry, prompting several businesses to cut jobs or shut down.
US Real Estate Industry Overview
According to GlobalData, the market value of the real estate industry in the US grew 1.6% in 2021, recovering from the decline in 2020 because of the pandemic. The global economic uncertainty and increasing inflation as a result of Russia’s invasion of Ukraine are expected to hamper the growth of the industry in the years ahead. Weak consumer confidence brought about by suppressed incomes and a tighter mortgage market with higher borrowing rates due to increasing inflation are expected to favor renting against the purchase of properties in the next few years.
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