Mortgage rates just reached their highest level 'in a generation' - will we reach 8%?

After soaring to an alarming 23-year high last week, mortgage rates have soared further into the stratosphere ahead of a scary start to October.

For the week ended Oct. 5, 30-year fixed-rate mortgage rates averaged 7.49 percent, according to Freddie Mac. This is a significant jump from last week's high of 7.31%, a rate not seen since 2000.

"Mortgage rates have maintained their upward trajectory as the 10-year Treasury yield, a key benchmark, has climbed," said Sam Khater, Freddie Mac's chief economist. "Several factors, including changes in inflation, the labor market and uncertainty surrounding the Federal Reserve's next move, are contributing to the highest mortgage rates in a generation."

Whether these rates will strengthen even further towards the dreaded 8% mark is anyone's guess - but what does seem clear is that these rates are not just a random blip, but have staying power.

"Mortgage interest rates have remained stable in nearly 20-year territory over the past few weeks," notes Realtor.com® economic research analyst Hannah Jones in her analysis. "The combination of high mortgage rates and high home prices continues to push home ownership out of the realm of possibility for many buyers."

High mortgage rates collide with low inventory

Buyers willing to take on the latest eye-watering interest rate may not find much to buy.

In the week ended Sept. 30, new listings fell 1.2 percent from last year, marking a 65-week decline. In addition, the total housing stock (both new and old listings) lags behind last year's levels by 2.6%.

The inventory squeeze goes right back to the mortgage rates.

"We expect homeowners to feel somewhat 'locked in' by mortgage rates until they drop significantly, which will keep new listing activity slow," says Jones.

The problem of high house prices

Low inventory leads to higher home prices, adding even more financial distress to a continued hit to buyers' bottom lines.

In September, real estate list prices hovered around a median of $430,000. And in the week ending September 30, prices rose 0.7% compared to last year.

While high home prices continue to be another rain cloud in the overall mortgage interest storm, there is a tiny bright spot: Prices have not risen above last year's record high of $449,000 set in June.

Indeed, median price growth has ranged from -0.9% to +1.1% since mid-May, "highlighting the push and pull between downward price pressure due to lower buyer demand and upward price pressure due to limited housing inventory," Jones explains. "It seems that prices will remain slightly above last year's level even in the fall and winter months when the market will recover from the slump at the end of 2022."

Proof that 'Eager Home Buyers' are still out there

Despite a mountain of affordability challenges, what Jones describes as "eager home buyers" are still wasting no time making offers on homes.

Homes spent 48 days on the market this September - just one day more than last year. And in the week ending September 30, homes matched the number of days on the market compared to this time last year.

"As the real estate market continues to recover from the slowdown experienced in 2022, it is very likely that homes will start selling faster than a year ago in the coming weeks, despite lower demand," says Jones.

Home buyers who haven't found the perfect home have two options to offer.

New homes offer a path to homeownership as the inventory of existing homes continues to be flat. And other buyers may choose to sit tight on rent until the housing market recovers.

"Rental prices have fallen over the past few months, giving buyers the opportunity to consider their options with less urgency," concludes Jones. "As a result, we anticipate that more households will choose to stay in the rental market for a longer period of time, giving them more time to save for their future homes."