US mortgage rates are approaching 7%, an ominous sign for the housing market

(Bloomberg) — U.S. mortgage interest rates have risen to nearly 7%, threatening to squeeze buyers trying to break into the housing market.

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The average 30-year mortgage rose to 6.91% as of Jan. 2, up from 6.85% the week before, according to Freddie Mac data released Thursday. A measure from the Mortgage Bankers Association advanced 8 basis points to 6.97% in the period ending Dec. 27, the highest level in nearly six months.

High borrowing costs affect affordability. It has also pressured demand recently, with the MBA Home Purchase Orders Index falling nearly 7% to its lowest level since mid-November. While the numbers have been adjusted for seasonal influences, they are still subject to wide fluctuations during the year-end holidays.

“It’s not a good way to start the new year,” said Odita Koshy, deputy chief economist at First American Financial Corp. Industry experts are reaching a consensus that 2025 is another year of a longer rally for the housing market. It’s not great news.

Mortgage rates tend to track Treasury yields, which continued to rise in late December after Fed policymakers expected the pace of interest rate cuts to slow in 2025 amid flattening inflation.

“Compared to this time last year, rates are high and affordability headwinds persist in the market,” Sam Khater, chief economist at Freddie Mac, said Thursday in a statement.

If mortgage rates stabilize, even at a high level, that could help kick-start a housing recovery, Koshy said. She added that if the Fed continues to lower its benchmark interest rate, it could help ease mortgage rates from current levels.

Despite the rise in mortgage interest rates at the end of the year, separate data from the National Association of Realtors showed that potential homebuyers are becoming more accustomed to a higher-rate environment.

In November, when prices averaged about 6.8%, the measure of contract signings to buy previously owned homes rose to the highest level since February 2023. Demand helped inventory rise.

The MBA survey, conducted weekly since 1990, uses responses from mortgage bankers, commercial banks and savings funds. The data covers more than 75% of all retail residential mortgage applications in the United States.

(Updates with Freddie Mac data start in first paragraph.)

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