Mortgage rates hit 3-year high, applications drop 6%

Mortgage rates climbed to their highest level in nearly three years, pushing the weekly average 30-year fixed rate to 7.28% as of Thursday. Freddie Mac reported the rate has risen 0.94 points from a year ago and 0.25 points from the previous week. This climb mirrors the broader movement in government debt, as 10-year Treasury yields have increased by more than 1.25 percentage points since the Iran conflict began in February.

The rise in rates has triggered a sharp decline in lending activity. The Mortgage Bankers Association reported Wednesday that mortgage applications for the week ended Sept. 25 fell 6% from the prior week. With rates at their peak since November 2023, borrowers are shifting toward alternative products to manage costs. Adjustable-rate mortgages accounted for 10.3% of applications in the most recent period, the highest share since October 2025, according to MBA data.

Bob Broeksmit, CEO of the Mortgage Bankers Association, stated in a written release that affordability and borrower demand have weakened in recent weeks. He noted that the higher-rate environment continues to pressure both prospective homebuyers and homeowners seeking to refinance. The association's data reflects a market where elevated borrowing costs are directly limiting transaction volume.

Home builders are responding to these softer conditions with pricing adjustments. William Hollinger, senior vice president at KB Home, said on an earnings call last week that greater affordability pressures have contributed to increased pricing pressures across many markets. He noted that the builder has made pricing adjustments as sellers look to attract buyers in a slower environment.

Economists suggest the current spike may not be permanent. Thomas Ryan, senior North America economist at Capital Economics, wrote Tuesday that he expects the situation to improve next year. Ryan argued that energy prices will drop back and that the aggressive Federal Reserve tightening cycle priced into money markets may not fully materialize, causing mortgage rates to retrace most of their recent increases. Capital Economics projected that 30-year fixed mortgage rates would average 6.25% by the end of 2027.