Rising Home Loan Rates Impact Housing Market

(Reuters) – The interest rate for the most popular U.S. home loan jumped last week to 6.73%, its highest since July, adding to headwinds for the housing market even as the Federal Reserve looks set to further lower its target for short-term borrowing costs.

The average contract rate on a 30-year fixed-rate mortgage rose 21 basis points in the week ended Oct. 25, according to the Mortgage Bankers Association.

The main home-loan rate is now 60 basis points above where it was immediately after the Fed's mid-September meeting, when the central bank made an initial half percentage point cut to the policy interest rate and signaled more reductions to come.

Mortgage rates had been falling in anticipation of the Fed's move, injecting new life into the housing market. Contracts to buy previously owned homes jumped by the most in four years in September, as reported by the National Association of Realtors. Pending sales typically turn into actual sales a month or two later.

However, almost immediately after the Fed's September meeting, home loan rates began climbing again due to stronger-than-expected data, including a surge in spending and significant job gains, which mitigated recession concerns and bolstered expectations for a slower pace of rate cuts. A report showing consumer and business spending also reinforced positive economic growth in the last quarter.

Additionally, traders have been increasingly betting that inflation and interest rates could remain high if Donald Trump wins the presidency and his Republican party takes control of Congress in next week's closely contested elections. U.S. 10-year Treasury yields, which mortgage rates closely track, reached a nearly four-month high on Tuesday.

Refinancing applications declined last week, according to the MBA, making up just 43.1% of total mortgage applications, below the historic median of 48%.