The COVID-19 pandemic has caused an unprecedented surge in housing prices, and this has led to an increase in the cost of mortgages. The decrease in demand for housing has given homebuilders time to catch up, but investors are now demanding higher returns due to expectations of higher inflation as the economy recovers. This, in turn, has caused the interest rates on mortgages and other loans to rise. In August, the 30-year fixed mortgage rate was at an all-time low of close to 2.87%, according to the Atlanta Federal Reserve.
However, this rate is no longer enough to compensate for the rising prices. The monthly payments made by new buyers on a subset of mortgages backed by Freddie Mac have increased more sharply since the start of the pandemic than at any time in the past 25 years. The Atlanta Federal Reserve reports that low mortgage interest rates during the coronavirus pandemic were a catalyst for the increase in demand for housing. However, mortgage rates have now surpassed 5%, the highest in more than a decade, according to data shared by Freddie Mac.
This week, Freddie Mac said that the average interest rate on a 30-year fixed-rate mortgage rose above 3% for the first time since July. The Federal Reserve Bank of Atlanta's report states that even with current low interest rates, mortgage payments are becoming increasingly unaffordable for the average American family. In February, according to the Mortgage Bankers Association, the average monthly payment for a new mortgage application in the United States increased more than 8 percent in just one month. It is clear that mortgage rates are rising faster than they have in decades.
In a context of annual inflation of 8 percent, a mortgage interest rate of 4.5 percent is actually a good deal. Lagging revenues are behind this rapid increase in mortgage costs, which has created some of the most significant affordability challenges of the past 15 years. A typical rent payment in May is more expensive than paying a mortgage with a 20% down payment, including taxes and insurance, in just five of the 50 largest metropolitan areas. This shows that despite rising mortgage costs, it is still cheaper to buy than rent in many areas.