Current mortgage rates are the highest they've been since 2001. Is there an end in sight?

Homebuyers’ purchasing power diminished further in August as mortgage rates continued their upward march, averaging 7.2% over the week ending on Thursday, the highest level since 2001, according to newly released data by Freddie Mac.

Mortgage rates climbed to the highest levels in more than two decades the week prior averaging 7.09%. A year ago at this time, the 30-year FRM averaged 5.5%.

“Indications of ongoing economic strength will likely continue to keep upward pressure on rates in the short-term,” said Sam Khater, Freddie Mac’s Chief Economist. “As rates remain high and supply of unsold homes woefully low, incoming data shows that existing homes sales continue to fall."

Khater said a slight increase in new home availability should "provide modest relief to the unyielding housing inventory predicament.”

The Federal Reserve’s interest rate hikes to fight inflation have driven the yield on the 10-year treasury bond, a benchmark for pricing an average 30-year loan, causing mortgage rates to climb, say experts.

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The last time the 30-year fixed-rate mortgage exceeded 7% was November, 2022.

Mortgage applications decreased 4% from one week earlier, and purchase activity fell to a 28-year low, according to data from the Mortgage Bankers Association for the week ending Aug.18.

“Applications for home purchase mortgages dropped to their lowest level since April 1995, as homebuyers withdrew from the market due to the elevated rate environment and the erosion of purchasing power,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Low housing supply is also keeping home prices high in many markets, adding to the affordability hurdles buyers are facing.”

What is the current mortgage rate?

Mortgage rates can change daily, and sometimes more than once a day.

The average 30-year fixed mortgage interest rate on Thursday was 7.53%, according to Bankrate.com. For homeowners looking to refinance, the national average interest rate for a 30-year fixed refinance is 7.80%. Today's average 15-year fixed refinance interest rate is 6.9%

Why are home sales falling?

Higher interest rates can add hundreds of dollars to a monthly mortgage payment.

More than 85% of current mortgage holders are locked into an under 5% mortgage interest rate, which makes these homeowners reluctant to trade in their homes for another at today's high rates.

Sales of existing homes fell 2.2% from June to a seasonally adjusted annual rate of 4.07 million in July, according to the National Association of Realtors. Year-over-year, sales were down by 17% (from 4.88 million in July 2022).

Total housing inventory at the end of July was 1.11 million, down 15% from one year ago. Unsold inventory sits at a 3.3-month supply at the current sales pace, which is considered to indicate a seller's market.

The median existing-home price for all housing types in July was $406,700, an increase of 1.9% from July 2022 ($399,000).

Why are sales of new-construction homes going up?

Sales of newly built, single-family homes in July increased 4.4% to a 714,000 seasonally adjusted annual rate, according to newly released data by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. The pace of new home sales in July was up 31.5% from a year ago.

"New home sales were solid in July because of an ongoing housing deficit in the U.S. and a lack of resales stemming from many home owners electing to stay put to preserve their low mortgage rates,” said Alicia Huey, chairman of the National Association of Home Builders and a custom home builder and developer from Birmingham, Alabama.

New single-family home inventory in July was 437,000, up 4.8% compared to a year ago. This represents a 7.3 months’ supply at the current building pace. A six months’ supply is considered balanced.

Currently, of the total home inventory, including both new and resale homes, 31% of homes available for sale are newly built.  

The median new home sale price in July was $436,700, down 9% compared to a year ago. Pricing is down both due to builder incentives and a shift towards building slightly smaller homes, according to the builders' association.

Should home buyers consider new-construction homes?

Although existing homes account for 85% of U.S. sales, it's time for consumers to take a closer look at new home sales, according to Jeff Taylor, member of the Mortgage Bankers Association and Founder of Mphasis Digital Risk, which does due diligence on mortgages for the largest banks and lenders.

Taylor notes that builders are offering to buy down mortgage rates by as much as 1 - 1.5 points, which can save buyers thousands or even tens of thousands of dollars, depending on the price of the house and the type of mortgage.

"Most of the large, national home builders have their own mortgage companies, so they have greater flexibility than traditional lenders," Taylor told USA TODAY. "Of course, those mortgages − and the benefits that go with them − are designed for their own customers."

Other builders are offering closing cost credits and upgrades including adding in free rooms or even a swimming pool, he says.

Swapna Venugopal Ramaswamy is a housing and economy correspondent for USA TODAY.  You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.