The U.S. housing market has taken an unexpected turn as mortgage rates have surged to their highest levels since August. This sharp reversal has caught homebuyers off guard, resulting in the largest weekly drop in mortgage applications since mid-August. The sudden uptick in rates adds pressure to an already challenging housing market where affordability and supply remain major hurdles for prospective buyers.
The average interest rate for a 30-year fixed-rate mortgage on conforming loans (under $766,550) jumped 22 basis points to 6.36% in the week ending October 4, according to the Mortgage Bankers Association (MBA). This marks the highest level since August and represents the largest weekly increase in 30-year rates since April 2024. For context, just a week earlier, the average rate stood at 6.14%, mirroring the lows seen in September 2022.
This sudden surge in borrowing costs has cooled demand, with mortgage rates climbing in tandem with Treasury yields. In the same week, rates for jumbo loans (those exceeding $766,550) also rose, hitting 6.64%, a 14-basis-point increase from the previous week.
The spike in mortgage rates has led to a sharp decline in demand for home loans. Overall mortgage applications dropped 5.1% in the first week of October, following a 1.3% decline the previous week. This back-to-back pullback significantly trimmed the nearly 30% increase in mortgage demand seen in September. Applications for home refinancing, which are highly sensitive to short-term rate changes, plummeted by 9% from the previous week.
The primary driver of this recent rate spike was the unexpectedly robust September jobs report, which exceeded market expectations and pushed Treasury yields higher. The U.S. economy added 254,000 nonfarm payrolls last month, well above the forecasted 140,000. The unemployment rate also dipped to 4.1%, while wages grew faster than anticipated, indicating a labor market that remains hotter than expected.
“Across every dimension, the September employment report showed a job market that was stronger than expected,” said Mike Fratantoni, chief economist at the MBA. He added that while the data could support a “soft landing” for the economy, it also raises concerns about inflation’s persistence. The strong labor market suggests the Federal Reserve may not need to cut rates as quickly as many had hoped.
Following the strong jobs data, traders revised their expectations for Federal Reserve policy. Before the report, many anticipated a potential back-to-back 50-basis-point rate cut in November. However, the latest labor developments have completely wiped out those expectations. Investors are currently assigning an 87% chance of a 25-basis-point cut, while the remaining odds are for a no-rate cut scenario, as per the CME FedWatch tool.
The 30-year Treasury yield, which often serves as a barometer for mortgage rates, jumped by 15 basis points last week to 4.30%. Meanwhile, the 10-year yield also breached the 4% threshold, something investors hardly expected just weeks after a sizable Fed rate cut. Mortgage-linked stocks took a hit, pressured by rising bond yields. The VanEck Mortgage REIT Income ETF MORT dropped nearly 5% last week and is down an additional 0.8% this week. Meanwhile, the iShares Residential and Multisector Real Estate ETF REZ slid almost 3% last week and has fallen another 1% so far this week.
Looking ahead, the MBA forecasts that longer-term rates, including mortgage rates, will stay within a relatively narrow range over the next year. Though this recent spike has brought rates to the higher end of that range, the MBA predicts mortgage rates will remain close to 6% for much of the next 12 months. However, any future surprises in inflation or economic data could disrupt this outlook. If Treasury yields continue to rise, mortgage rates may follow suit, further straining affordability for homebuyers and applying more downward pressure on housing demand.
