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Mortgage rates remain above 7% for third week in a row

Mortgage rates eased back down this week, but remain above 7%, which is prohibitively high for many homebuyers.

The average rate on the 30-year fixed mortgage declined to 7.18% this week from 7.23% the week before, according to Freddie Mac. This marks the third straight week rates have been above 7%, the first time that's happened since April 2002.

Elevated rates are colliding with the end of the traditional homebuying season, but the environment remains a major headwind for those buyers left in the market and further cements many homeowners' decisions to not sell now.

"The impact of mortgage rates on activity right now might not be all that big because activity is expected to slow down," Zillow senior economist Orphe Divounguy told Yahoo Finance. "The housing market is very seasonal so it's expected to slow down right now and pick back up in the spring."

Buyer demand still low

Buyers still in the market took advantage of the somewhat softer rate.

Mortgage application volume for purchases picked up 2% last week on a seasonally adjusted basis, compared with the previous week, the Mortgage Bankers Association (MBA) survey for the week ending Aug. 25 found.

"Treasury yields peaked early in the week and did move lower by the end, which may have spurred some activity," MBA deputy chief economist Joel Kan said in a statement. Fixed mortgage rates tend to follow the direction of the 10-year Treasury yield.

Still, demand remains low, Kan said, with volumes off 27% from the same time last year.

Adding to the affordability concerns are home prices, which have been pushed up by solid demand and sparse inventory.

In June, home prices rose for the fifth consecutive month, according to the S&P Case-Shiller US National Composite home price index, which is off just 0.02% from its all-time peak a year ago.

(AP Photo/Steven Senne, File)
(AP Photo/Steven Senne, File) (ASSOCIATED PRESS)

Reluctant homeowners

Mortgage rates are also to blame for the shortage in homes for sale.

Most homeowners have a mortgage rate far below the prevailing rate. According to the Bureau of Economic Analysis, the average rate on all outstanding mortgage debt was 3.59% in the second quarter, nearly half the 7.18% rate recorded this week.

"For the bulk of those who already have a mortgage, a new mortgage at current rates would incur significantly higher costs," Jake Gordon, research analyst at Bespoke Investment Group, wrote in a note following the BEA’s revised data release on Wednesday.

"That gives them little reason to enter the housing market, and thus, is part of the reason for the dearth in housing inventories," the analyst added.

New homes to the rescue

With little on the resale market, some buyers have turned to new homes.

New construction now made up nearly 31% of the for-sale inventory pie in July, up from around 20% in the years from 2000 until the pandemic, according to analysis from Odeta Kushi, First American's deputy chief economist.

As a result, builders have ramped up construction and incentives. A prevalent perk is paying for mortgage rate buydowns for prospective buyers.

For instance, some new buyers are getting mortgage rates below 6% as builders allocate 4%-6% of the home sale proceeds toward buying down the mortgage rate, data from John Burns Research & Consulting shows.

"As mortgage rates swing between the low- and mid-7% range, we could see this uncertainty around rates have more of a cooling effect on sales," Eric Finnigan, vice president of research and demographics at John Burns Research and Consulting, told Yahoo Finance.

Mortgage rate forecast

FILE - In this March 3, 2020 file photo, Federal Reserve Chair Jerome Powell speaks during a news conference to discuss an announcement from the Federal Open Market Committee, in Washington.  On Thursday, Aug. 26, Powell will address the Fed's annual gathering of global central bankers, normally held in Jackson Hole, Wyo., but this time being conducted virtually. (AP Photo/Jacquelyn Martin, File)
Federal Reserve Chair Jerome Powell speaks during a news conference to discuss an announcement from the Federal Open Market Committee in Washington, D.C., on March 3, 2020. (AP Photo/Jacquelyn Martin, File) (ASSOCIATED PRESS)

Where mortgage rates go from here remains to be seen.

"Recent volatility makes it difficult to forecast where rates will go next, but we should have a better gauge in September as the Federal Reserve determines their next steps regarding interest rate hikes," Sam Khater, Freddie Mac’s chief economist, said in a statement.

The increase in rates is largely because the yield on the 10-year Treasury has skyrocketed over the past 18 months as the Federal Reserve tries to tamp down inflation to its 2% goal.

Read more: What the latest Fed rate hike plan means for mortgage rates and loans

The Fed's preferred inflation reading slightly ticked up on annual basis in July, according to a government release on Thursday, overturning some of the prior month's drop as the battle to bring down inflation could be slower.

Last week, Federal Reserve Chairman Jerome Powell warned in his Jackson Hole speech that inflation still remains too high, suggesting that the central bank isn’t done.

"Additional evidence of persistently above-trend growth could put further progress on inflation at risk and could warrant further tightening of monetary policy," Powell said, also noting that home prices are still going up, even after 11 rate hikes.

"In addition, after decelerating sharply over the past 18 months, the housing sector is showing signs of picking back up."

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.

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