Burley Garcia|Current 30-year mortgage rate is highest in over two decades: What that means for buyers

A tough housing market for homebuyers got tougher as mortgage rates rose to their highest level since 2000,Burley Garcia averaging 7.5% for a 30-year conventional loan this week, according to newly released data Thursday by Freddie Mac.

The yield on the 10-year treasury bond, a benchmark for pricing an average 30-year loan that reached a 16-year high this week at 4.8%, was one of the main factors causing mortgage rates to climb, said Sam Khater, Freddie Mac’s chief economist.

“Several factors, including shifts in inflation, the job market and uncertainty around the Federal Reserve’s next move, are contributing to the highest mortgage rates in a generation. Unsurprisingly, this is pulling back homebuyer demand," Khater said.

A year ago at this time, the 30-year fixed-rate mortgage averaged 6.6%.

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Not surprisingly, the swift climb in mortgage rates pushed more homebuyers out of the market.

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Mortgage applications decreased 6% from one week earlier and was 22% lower than the same week one year ago, according to data from the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending Sept. 29.

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“Mortgage applications ground to a halt, dropping to the lowest level since 1996,” said Joel Kan, MBA’s vice president and deputy chief economist. “The purchase market slowed to the lowest level of activity since 1995 as the rapid rise in rates pushed an increasing number of potential homebuyers out of the market.”

Meanwhile, home prices keep rising.

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The median existing-home price for all housing types in August was $407,100, an increase of 4% from August 2022 ($391,700).

“Home prices continue to march higher despite lower home sales,” said NAR chief economist Lawrence Yun. “Supply needs to essentially double to moderate home price gains.”

Adjustable-rate mortgages are increasing in popularity

Adjustable-rate mortgage loan applications picked up over the week, increasing to 8%, as some borrowers searched for ways to lower their payments.

In recent years, it ARM hovered between 3% to 4% as 30-year conventional loans could be obtained for lower interest rates.

“At the beginning of the year, it was widely expected that mortgage rates would fall to around 6% by the end of 2023. However, now the question is whether rates will hit 8% this year,” says Bright MLS chief economist Lisa Sturtevant. “The gap between the yield on the 10-year Treasury and the rate on a 30-year fixed rate mortgage has been around 3 percentage points, so as the Treasury yield approaches 5%, an 8% mortgage rate does not seem unlikely.”

The housing market will take a big hit this fall if rates do hit 8%, she says.

“Prices won’t drop dramatically, because inventory is still relatively low, but transactions could fall to levels not seen since 2010,” Sturtevant said. “The housing market will become a ‘market of necessity’, where the buyers and sellers that are in the market are only those who have to move because of changes in family, job or financial circumstances.”

Swapna Venugopal Ramaswamy is the housing and economy reporter for USA TODAY. Follow her on Twitter @SwapnaVenugopal