1. Introduction: A New Era of Expensive Borrowing
For more than a decade, American homebuyers enjoyed historically low mortgage rates. The pandemic years even saw rates plunge below 3% for a 30-year fixed mortgage—fueling one of the hottest housing booms in modern history. But since early 2022, the Federal Reserve has been aggressively raising interest rates to fight inflation. That shift has pushed mortgage rates to multi-decade highs, reshaping the housing market and making homeownership far less affordable for millions of Americans.
2. The Mechanics: How Fed Policy Hits Mortgage Rates
When the Federal Reserve raises its policy rate (the federal funds rate), it indirectly drives up borrowing costs across the economy—including mortgages. Mortgage rates are influenced by several factors: the 10-year Treasury yield, investor demand for mortgage-backed securities, and the Fed’s balance-sheet policy. As these benchmarks rise, banks and lenders charge more for long-term loans, passing higher costs directly to homebuyers.
3. The Impact in Numbers
The following table shows how rising rates have impacted mortgage affordability:
| Year | Average 30-Year Fixed Rate | Monthly Payment (for $400,000 Loan) | Difference from 2021 |
|---|---|---|---|
| 2021 | 2.65% | $1,614 | — |
| 2023 | 7.79% | $2,879 | +$1,265 (+78%) |
| 2025 | 6.50% | $2,528 | +$914 (+57%) |
Source: Consumer Financial Protection Bureau & Freddie Mac Primary Mortgage Market Survey
4. Why Affordability Has Collapsed
- Higher rates reduce buying power: Every 1% increase in mortgage rates cuts purchasing power by roughly 10%.
- Home prices haven’t fallen enough: Despite some cooling, national prices remain elevated.
- “Lock-in” effect: Millions of homeowners refinanced into ultra-low rates during 2020–21.