Mortgage rates top 7%, dealing a further blow to the frozen housing market

By Samantha Delouya, John Towfighi, CNN

(CNN) — Mortgage rates reached a grim milestone this week, topping 7% for the first time since January 2025 and reaching their highest level during either of Donald Trump’s presidential terms.

The average 30-year fixed mortgage rate climbed to 7.03% this week, up from 6.95% last week, according to data released Thursday by Freddie Mac.

It’s the fifth-straight week of rising mortgage rates, putting a deeper squeeze on housing affordability. Higher rates mean larger monthly payments and less purchasing power for buyers.

“Beyond the immediate financial constraints, the 7% threshold is a foreboding psychological barrier,” said Bright MLS chief economist Lisa Sturtevant. “Crossing this mark could create a chilling effect on the market, leading to home sales transactions to slow considerably this fall.”

However, mortgage rates remain well below the 7.79% peak they hit in 2023, when inflation was running at decades-high levels.

About seven months ago, the average 30-year mortgage rate briefly dipped below 6% for the first time in years, prompting hopes that cheaper borrowing would finally unfreeze the housing market. Instead, those hopes have faded as the war in Iran has pushed oil prices higher, adding fresh pressure to overall inflation and mortgage rates.

Consider the difference between a homebuyer who locked in their mortgage rate in February, when the average briefly fell to 5.98%, and someone buying today. On a median-priced home with a 20% down payment, today’s buyer would pay hundreds of thousands of dollars more in interest over the life of a 30-year mortgage.

“Expect 7% as the new normal,” said Lawrence Yun, chief economist at the National Association of Realtors, in a blog post last week.

Why are mortgage rates climbing?

Action in the bond market is the chief cause for higher mortgage rates. US bond yields have climbed this year, pushing up interest rates across the economy.

The 10-year US Treasury yield is a benchmark for mortgage rates: They loosely track the 10-year, which moves with investors’ expectations for rate decisions by the Federal Reserve, but also inflation and growth expectations.

As the 10-year yield has climbed this year, mortgage rates have pushed higher. And this week, the 10-year Treasury yield surged to its highest level in nearly two decades after fresh data on Wednesday pointed to a strong economy and intensifying inflation nerves.

The 10-year yield started the year at around 4.15%, and is now trading around 5.15%, its highest level since 2007. The average 30-year fixed mortgage rate was 6.16% at the start of the year.

Bond yields are rising as markets adjust to central banks starting to raise interest rates to tamp down inflation driven in large part by the energy shock caused by the Iran war.

The move higher in bond yields raises the cost of borrowing money, and some economists worry that yields have reached levels that could pose a risk for the broader economy.

Higher bond yields translate into higher mortgage rates, as well as auto loans, consumer loans and commercial loans.

Higher for longer

When Trump left office in January 2021, the 30-year fixed mortgage rate was just below 2.8%.

A property developer and real estate investor himself, Trump placed the blame for the subsequent rise in mortgage rates squarely on the Fed’s shoulders. While mortgage rates don’t directly follow the central bank’s policy moves, Trump often berated former Fed Chair Jerome Powell for failing to lower the Fed’s benchmark interest rate quickly enough when inflation initially spiked during the early years of the pandemic.

Last week, Trump’s handpicked successor to Powell, Kevin Warsh, announced that the central bank hiked interest rates by a quarter point – its first hike since July 2023 – in an attempt to tamp down inflation. The central bank’s members have indicated they foresee at least one other rate hike in 2026.

On his social media platform Truth Social, Trump posted last week that “interest rates in the United States should be 1%, or less,” a significant drop from the Fed’s current rate range of 3.75% to 4%.

Ripple effects of higher rates

Higher rates are already starting to slow down the housing market.

Shares of some of the country’s largest homebuilders, including Lennar (LEN), D.R. Horton (DHI) and PulteGroup (PHM), have fallen over the past month as higher borrowing costs threaten to weigh on both home sales and new construction.

Last week, Lennar CEO Stuart Miller warned that many homebuyers are “clearly stretching” to afford to afford a home lately, attributing the company’s disappointing earnings to higher mortgage rates and stubborn inflation.

Although the pace of home sales have remained largely unchanged this year compared to last year, according to NAR data through August, there are some signs that higher mortgage rates have started scaring off some buyers.

Pending home sales, which measure the number of homes under contract, rose 0.3% in August from July, but fell 4.7% from a year ago, according to the National Association of Realtors.

Mortgage applications to buy a new home fell 11% last week from the same week a year ago, according to Mortgage Bankers Association data released on Wednesday.

Among those still looking to buy, more borrowers are turning to adjustable-rate mortgages, or ARMs – a riskier loan product that played a role in the housing market’s buildup to the 2008 financial crisis.

Nearly 10% of borrowers opted for an ARM last week, according to the MBA. These loans typically offer a lower fixed rate for five, seven or 10 years before resetting with market rates. If rates are higher when the fixed period ends, borrowers can face sharply higher monthly payments.

Rates on 5/1 ARMs – which are fixed for five years and then adjust annually – were more than a percentage point lower than those for fixed-rate loans last week, said Mike Fratantoni, MBA’s chief economist.

Home prices have yet to reflect a national slowdown in demand, though. The median existing home price was $429,100 in August, the 38th consecutive month of year-over-year price increases, according to NAR.

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