What happened

The average rate on a 30-year fixed-rate mortgage climbed to 6.69% for the week ending August 6, up from 6.66% the previous week, according to Freddie Mac's Primary Mortgage Market Survey. The rate is higher than it was at this point last year, extending a gradual upward drift that has persisted through much of the summer.

What we know

Freddie Mac's weekly survey, one of the most closely watched benchmarks for U.S. mortgage rates, has shown rates edging higher over recent weeks even as the Federal Reserve has held its own benchmark rate steady since last year. That's a reminder that mortgage rates don't move in lockstep with the Fed's short-term rate -- they track more closely with yields on long-term Treasury bonds, which have risen amid uncertainty about the Fed's next moves and broader geopolitical tensions affecting energy markets.

Why it matters

Higher mortgage rates directly raise the monthly cost of financing a home purchase, pricing some potential buyers out of the market entirely and reducing how much home others can afford at a given budget. For a household financing a typical home purchase, the difference between a 6.5% and a 6.7% rate can add meaningfully to a monthly payment and tens of thousands of dollars in interest over the life of a 30-year loan.

The rate increase also affects the broader housing market: higher financing costs tend to slow home sales and can keep existing homeowners -- many of whom locked in lower rates in prior years -- reluctant to sell and take on a new mortgage at today's rates, a dynamic that has kept the inventory of homes for sale tight in many markets.

Background

Mortgage rates surged from historic lows in the early part of the decade to multi-year highs as the Fed raised rates aggressively to fight inflation. Rates have fluctuated in a roughly 6%-7% range for the past couple of years -- well below their recent peak but far above the sub-4% rates common in the years before that tightening cycle.

Because so many current homeowners locked in rates well below 5% before the tightening cycle began, elevated rates have also contributed to what housing economists call the "lock-in effect": owners who might otherwise sell are reluctant to give up a low fixed rate for a new mortgage at today's levels, which has kept the supply of homes for sale tighter than it would otherwise be in many markets.

The bigger picture

Mortgage rates don't move in lockstep with the Fed's benchmark rate -- they track more closely with long-term Treasury yields, which reflect investors' expectations about future inflation and growth as much as the Fed's current policy stance. That's part of why rates have drifted higher even as the Fed has held its own rate steady: bond markets have been pricing in a slower pace of future rate cuts than they previously expected, pushing longer-term borrowing costs up in the process.

What happens next

Mortgage rates will continue to move with Treasury yields, which in turn respond to incoming inflation and employment data, as well as expectations for the Fed's September rate decision. Freddie Mac updates its survey weekly, offering an ongoing read on financing conditions for prospective buyers.

Sources

This article is based on Freddie Mac's Primary Mortgage Market Survey data.