8% mortgage rates are perilously close — that’s a psychological milestone for the housing market

“Round numbers catch people’s attention, but the real concern is the increase in monthly mortgage payments relative to incomes,” deRitis said.

“Most buyers make their decisions based on what they can afford monthly rather than the absolute level of house prices,” he added. “With rates rising and house prices showing no signs of reversing, potential homebuyers are increasingly moving to the sidelines.”

“We haven’t seen an 8% mortgage rate in over 20 years,” deRitis added, which “likely has a psychological effect as well.”

The 30-year mortgage rate inches towards 8% as the 10-year Treasury yields stays close to 4.8%. Mortgage rates closely track the 10-year and the increase in yields, which is itself a reaction to the market expecting the U.S. Federal Reserve not to ease up on rate hikes given the relative strength of the economy. 

When will rates go to 8%?

For some buyers, rates are already at 8%. These could be buyers who are non-prime, have high loan-to-value ratios, or are taking out a non-qualified mortgage loan.  (Non-qualified mortgage loans don’t have to adhere to Federal Housing Administration, USDA or Veteran Affairs rules issued by Freddie Mac
FMCC,
-5.89%
and Fannie Mae
FNMA,
-3.93%.
)

For others, it may take a little bit more time for rates to hit 8%. 

“The 30-year fixed mortgage rate could reach 8% later this month, and possibly stay at that level for the remainder of the year,” Lawrence Yun, chief economist at the National Association of Realtors, said in a statement. In September, Yun expects rates to reach 8%, based on how the 10-year Treasury yield is trending.

The spread between the 30-year mortgage rate as tracked by Freddie Mac and the 10-year Treasury has been around 300 basis points over the last year, Yun said; historically, that spread has been closer to 175 basis points. 

The last time the spread was this high was during the global financial crisis in December of 2008 — “and then only briefly,” deRitis said. 

“We have to go back to the financial turmoil of the early 1980s to observe spreads as wide as they are today for an extended period of time,” he added, as seen in the chart below.

Taking a step back, investor sentiment is driven by economic data. The stronger the U.S. economy, the more likely the Fed will hike rates, and ultimately that pushes up mortgage rates.

“Momentum could continue to drive rates upward in the near term,” deRitis said. “Employment data from the [Bureau of Labor Statistics] due out on Friday could be the catalyst for either continued increases or a reversal as bond traders second-guess Fed interest rate policy.”

Hence, “mortgage rates will stop rising and start falling only if the Fed indicates likely rate cuts next year,” NAR’s Yun said. 

“Some consumers may make purchasing decisions based on mortgage rates reaching certain full percentage-point markers,” Yun added. “So 8% could be a psychological marker for some consumers.”

What’s the historical average for mortgage rates?

Historically, consumers have been used to far higher mortgage rates. The average rate for the 30-year between April 1971 and September 2023 is 7.74%, according to Freddie Mac’s data. The median is 7.41%. 

Both of these figures include a period of time in 1981 when rates surged to a series high of 18.6%.

At the time, rates were so high that buyers considered an 8.5% loan a steal, according to this Wshington Post report about assumable mortgages, published in 1982.

There may be more gloom ahead: Americans are expecting rates to rise over 8%, according to a March survey by the New York Fed.

To be sure, millions of homeowners will be unaffected by the rise in rates unless they refinance or take on another mortgage, as many locked in ultra-low rates during the pandemic years. 

New home buyers — such as young people who are currently renting and older folks looking to downsize — will be most affected by the rise in rates.