Mortgage rates top 7%, adding $268 a month for the same house

Orphe Divounguy, founder and chief economist of Quantitative Research Group and a former Zillow economist, said the rise in rates drives up the mortgage costs for homeowners.

Running the numbers on a median-priced home with 20% down, Divounguy found that principal and interest rises from about $2,067 a month at 6.3%, roughly where rates sat in April, to $2,335 at 7.5%, slightly above where they are now.

That is about $268 more each month, or roughly $3,200 a year, for the same house. 

Divounguy said most of the recent increase came from rising Treasury yields rather than the mortgage market itself.

The income needed to qualify under a standard benchmark that caps housing costs at 28% of income climbs from about $88,600 to $100,100, before taxes and insurance. Divounguy cautioned those are affordability benchmarks, not lender underwriting estimates, which also account for debts and credit.

U.S. existing-home sales rose 1.5% in September to a seasonally adjusted annual rate of 3.99 million, but contract signings fell to their lowest level since 2014, outside the early pandemic.

Sales were down 2.2% from a year earlier. The median existing-home price hit $417,500, up 1.3% from a year ago and the 39th consecutive month of year-over-year increases, according to the National Association of Realtors. Inventory rose to 1.60 million units, a 4.8-month supply.

“Despite the small monthly gain on a seasonally adjusted basis, August and September marked the two slowest months for home sales this year,” said Lawrence Yun, NAR’s chief economist.

NAR cited an average 30-year fixed-rate mortgage of 6.86% in September, up from 6.67% in August and 6.35% a year earlier, according to Freddie Mac. The monthly average understates where rates landed. Freddie Mac’s weekly survey hit 7.03% on Sept. 24 and 7.28% in the survey released Oct. 1 covering the final week of September. As of Thursday, the 30-year averaged 7.40%, up from 6.30% a year earlier.

“Seven percent is not a mechanical threshold,” Divounguy said of the rising rates. “But buyers are not reacting to 7% in isolation; they are reacting to rates above 7% combined with home prices that remain near record highs relative to incomes.”

The forward-looking data is weaker. Pending home sales fell 4% from August, the biggest monthly drop in more than three years, and hit their lowest level since spring 2014 outside the pandemic freeze of April 2020, according to Redfin.

Contract signings declined year over year in all 50 of the largest U.S. metros, the first time that has happened since September 2023, the last stretch when rates held above 7%. Zillow put newly pending sales down 8.5% from a year earlier. Nearly 15% of deals that went under contract in September fell through, the highest share in Redfin’s records outside March and April 2020.

Divounguy said much of the fourth quarter is already set. Based on Redfin data since 2012, excluding 2020, he estimated that about 60% of a change in pending sales shows up in the following month’s closings and another 27% a month after that. On that relationship, September’s drop in contract signings points to October closings falling from September, with November reflecting the rest of that decline plus contracts signed after rates moved above 7%.

Prices have held up because sellers have pulled back too, Divounguy said. Most sellers become buyers, so the same rates keeping first-time buyers out are also keeping listings off the market. The backlog of unsold listings is now the largest relative to buyer demand since 2015, he said, citing his own calculation that active listings equal roughly 4.8 times one month of contract signings, a different measure from NAR’s months’ supply, which is based on closed sales. His estimate of the buyer pool is down 10.5% from a year ago.

He expects the 1.3% national price gain to move closer to zero over the next few quarters. In the West, NAR’s median is already down 0.3% from a year ago. A sustained national decline is not his base case, but the risk rises if rates stay above 7% and inventory keeps growing faster than sales.

 In January, when Trump instructed Fannie Mae and Freddie Mac to buy $200 billion in mortgage bonds, he said it would drive “Mortgage Rates DOWN, monthly payments DOWN.” Freddie Mac’s weekly survey published that day averaged 6.16%. It was 7.40% Thursday.