Mortgage rates skyrocketed this week, soaring to their highest levels since 2008. The unexpectedly speedy escalation has had a chilling effect on the U.S. housing market, increasing pressure on an economy already hounded by unremitting inflation.

The 30-year fixed-rate mortgage, the most popular home loan product, jumped to 5.78% this week, up from 5.23% a week ago, according to Freddie Mac data released Thursday. The more than a half-percentage point rise was the biggest one-week jump since 1987. The jump came in anticipation of the Federal Reserve’s rate hike this week. The Fed hiked interest rates by the sharpest pace since 1994, to curb soaring inflation.

Consumers have been facing higher prices in nearly every facet of their lives. Now higher mortgage rates are limiting their housing choices or pricing them out altogether. A week ago, a $300,000 loan with a 30-year fixed-rate mortgage at a rate of 5.23% would have cost a borrower about $1,653 a month, excluding other costs such as taxes and insurance, Jacob Channel, a Lending Tree economist, wrote in an email. This week, that same loan costs them $1,756 a month, at 5.78%. That’s another $103 a month, $1,236 a year and $37,080 over the lifetime of the loan.

The housing boom that had been fueled by low rates is beginning to subside. Prices have yet to moderate, propped higher mainly by low inventory. Home prices were up 20.6% in March compared to a year earlier, according to the most recent Case-Shiller home price index. But sales have slowed. Existing home sales fell for the third month in a row in April, the most recent data available from the National Association of Realtors. Data from the Census Bureau released Thursday showed housing starts fell 14.4% from April and are down 3.5% year-over-year.

Besides leading to a pullback in sales of new and existing homes, higher rates have curbed the appetite for mortgages. Volume is down more than 50% compared with a year ago. The refinance share of mortgage applications is at its second-lowest level since December 2000.

As a result, real estate and mortgage brokerages are shedding jobs. Compass cut 10% of its non-broker staff and Redfin announced it was laying off about 470 employees. Pennymac Financial Services, a non-bank mortgage lender, is reducing its staff by 207 employees after cutting 230 employees in March.

The cool down in housing is due to the Federal Reserve raising its benchmark rate by 0.75 percentage point. The rate hike is the third this year by the Fed. At its May meeting, the central bank raised the federal funds rate by a half-percentage point. It took its first steps toward bringing down inflation in March when it boosted its benchmark rate for the first time since 2018.

Although the Fed doesn’t set mortgage rates, its actions influence them. The central bank has launched this initiative to rein in the highest inflation in 40 years, making a whole lost of lending beyond mortgages more expensive in an effort to reduce demand for goods and services.

“The annual inflation rate unexpectedly accelerated to 8.6% in May, and mortgage rates won’t have much reason to fall as long as inflation remains elevated,” said Holden Lewis, home and mortgage specialist at NerdWallet. “The Federal Reserve increased short-term rates … to slow economic growth and get inflation under control.”

Mortgage rates “continued climbing this week in response to last week’s inflation data and in anticipation of this week’s increase in the target federal funds rate,” said Hannah Jones, an economic data analyst at Realtor.com. “Although rates tracked by Freddie Mac remain in the fives, other mortgage surveys showed interest rates exceeding 6% early this week.”

Investors had largely anticipated the aggressive move, which is why long-term bond yields tracked higher this week. The yield on the 10-year Treasury climbed to its highest level in more than a decade, reaching 3.49% on Tuesday before falling back to 3.33% after the Fed announcement. At the beginning of the year, the yield was 1.63%.

“The 30-year mortgage rate tends to follow the 10-year Treasury yield and the 10-year Treasury just hit its highest yield in 11 years,” Steve Reich, chief operations officer at Finance of America Mortgage, wrote in an email. “The 10-year Treasury is rising because investors are anticipating rate increases in the future. As a result, we’ve also seen mortgage rates follow suit and tick up recently. In the short-term, mortgage rates will likely continue to follow a similar range and keep pace with the 10-year Treasury yield.”

Lewis expects mortgage rates to be less volatile in the near future.

“Mortgage rates tend to go up and down in anticipation of Fed rate moves, which is a way of saying that the Fed increase was already baked into mortgage rates,” he said. “In other words, mortgage rates are more likely to go up or down before Fed meetings than after Fed meetings. Over the next week or two, we probably won’t see big movements in mortgage rates like we did last week.”

The Fed signaled another 0.75 percentage point increase could be on the table next month as well, although Federal Reserve Chair Jerome Powell told reporters in a news conference after the meeting he does not expect moves of this size to be common.

“Given the consumer-price inflation rose to a 40-year high last week, it’s very possible that the Fed will take a more hawkish position towards inflation and increase rates at a faster pace than originally expected,” Reich wrote. “While there is always the possibility rates may cool later in the year depending on where the Fed projects inflation will be, we can likely expect to see mortgage interest rates continue to rise over the course of the next few months.”

Low rates fueled the revival of the U.S. housing market after the Great Recession and have helped drive home prices to record levels. But after the pandemic sent rates to historical lows, rates have been on a tear. The 30-year fixed average, which started the year at 3.22%, hit 4% in March and 5% five weeks later. Although economists had expected rates to rise, they have escalated far more quickly than they had predicted.

(c) 2022, The Washington Post · Kathy Orton