US mortgage rates approach 7% as Fed hike deepens housing squeeze

US homebuyers hoping for relief from climbing mortgage rates are likely to be disappointed, with the average rate on a 30-year fixed-rate loan closing in on 7%.

Last week the weekly average stood at 6.76%, its highest in more than 14 months, and this week's reading was expected to show a further increase. Other trackers have already recorded averages at or just above 7% in recent days.

Higher rates add hundreds of dollars to monthly payments and erode purchasing power, prompting some prospective buyers to postpone purchases.

The housing market has been sluggish through the year, weighed down by rising borrowing costs. Mortgage rates have climbed steadily since the US-Iran war began in late February, as expectations of higher inflation amid surging oil prices pushed up the long-term bond yields that lenders use to price home loans.

The yield on the 10-year Treasury note, a key benchmark, was 3.97% in late February and breached 5% on Monday for the first time since 2023.

On Wednesday, the Federal Reserve raised its key interest rate for the first time in three years to tame inflation, and signalled another increase could come later this year. Although the central bank does not set mortgage rates, its decisions are closely watched by bond investors and can influence the 10-year Treasury yield.

Lisa Sturtevant, chief economist at Bright MLS, said the hike "all but guarantees that mortgage rates will remain stuck at or above the 7% threshold," creating a barrier that would squeeze affordability and sideline more buyers.

The US housing market has been in a slump since 2022, when mortgage rates began rising from pandemic-era lows. Sales of previously occupied homes were essentially flat last year at a 30-year low, and slowed again last month. A sharp run-up in home prices earlier this decade and a chronic shortage of homes, worsened by years of below-average construction, have priced many aspiring owners out of the market.

Individual borrowers may qualify for rates above or below the average depending on income, credit and other factors.

It remains unclear how much further mortgage rates will rise, as recent increases may already reflect expectations of Fed tightening. Jake Krimmel, senior economist at Realtor.com, said that matters because it indicates how mortgage rates and the bond market might respond to potential Fed hikes.