Mortgage Rates Surge Amid Debt Ceiling Standoff | Mortgages Advice

Mortgage rates increased across the board this week, with the 30-year fixed rate jumping 15 basis points to 7.18%. Average mortgage interest rates are now at the highest point since November 2022, when they peaked at 7.33%.

Here are the current mortgage rates, without discount points unless otherwise noted, as of May 25:

“The U.S. economy is showing continued resilience, which, combined with debt ceiling concerns, led to higher mortgage rates this week. Dampened affordability remains an issue for interested homebuyers, homeowners seem unwilling to lose their low rate put their home on the market.”

– Sam Khater, Freddie Mac’s chief economist, in a May 25 statement

U.S. government debt is considered to be the ultimate safe-haven asset worldwide, allowing the Treasury Department to borrow lend money on competitive terms. That could change if the government goes into default, which the Treasury estimates could happen in early June unless Congress raises or suspends the debt ceiling.

Although economists agree that this scenario is unlikely, a government default would have unprecedented consequences. If the U.S. credit rating is downgraded, it would become more expensive for the government to repay its trillions of dollars’ worth of outstanding debt.

The country’s credit rating could still take a hit even if the government narrowly avoids a default. Realtor.com economist Jiayi Xu says, “The fears panic related to a potential government default could cause creditors to ask for higher interest rates from the U.S. Treasury, resulting in a significant increase in various borrowing costs, including mortgages.”

Just the uncertainty around whether lawmakers will avoid a default has sent waves throughout financial markets. For one, mortgage rates shot up this week as investors reacted to “political brinkmanship over the debt limit,” even though “the likelihood of default is virtually nil,” says George Ratiu, chief economist at Keeping Current Matters.

Although the debt ceiling has yet again been resurrected as a partisan bargaining chip, lawmakers on both sides of the aisle have good incentive to avoid a government default because of the financial impact it would have on constituents. In fact, Congress has raised, extended or revised the debt limit 78 times since 1960, including 49 times under Republican presidents 29 times under Democratic presidents, according to the Treasury Department.

As the government inched closer to default, President Joe Biden House Speaker Kevin McCarthy continued negotiations on lifting the debt limit. But lawmakers left the Capitol for the long holiday weekend, which means a debt ceiling vote could come on Tuesday at the earliest – just two days before the Treasury says it will run out of money to pay its bills.

“Resolving the debt impasse sooner rather than later would mitigate potential adverse effects on the housing market, which is already contending with high prices elevated mortgage rates,” Xu says.

Mortgage interest rates are painfully high for today’s homebuyers, who are faced with increasingly expensive monthly housing payments. The median monthly payment for mortgage applicants in the month of April was $2,112, according to the Mortgage Bankers Association. That’s an increase of about 38% since January 2022, when mortgage rates were still around 3% the median monthly payment was $1,526.

It’s not just higher interest rates that are driving up housing costs. Current mortgage rates are exacerbating an affordability crunch that’s also fueled by stubbornly high home prices. The median sales price for existing homes sold in April was $388,800, per the National Association of Realtors. While that’s down from the peak of $413,800 seen last July, it’s still more than $30,000 higher than it was in January 2022.

With housing affordability so out of balance, it’s no wonder why homebuyers are waiting on the sidelines for conditions to improve. The number of existing homes sold in April was 4.28 million units, much fewer than the 6.65 million units sold in January 2022. Home sellers would rather wait out this market, too, with for-sale inventory levels still well below pre-pandemic levels.

Mortgage rates are still widely expected to fall during the course of 2023, but economic uncertainty has driven borrowing costs higher during the normally busy spring homebuying season. MBA predicts in its latest Mortgage Finance Forecast that the average 30-year fixed rate will drop to 5.6% by the end of 2023 – although that’s higher than previously anticipated, with past forecasts showing the rate would fall to 5.2%.

In the meantime, we’ll continue keeping an eye on economic indicators related to inflation employment to see where mortgage rates are headed next. But for now, housing affordability challenges continue to plague the real estate market.