🚨 US Mortgage Rate Surpasses 7%

Today Korean Economic News | 2025.01.18

📌 US 30-Year Fixed Mortgage Rate Surpasses Annual 7%

💬 The US 30-year fixed mortgage rate has exceeded 7% annually for the first time in eight months. This is attributed to rising Treasury yields, increased housing construction costs, and surging insurance premiums due to natural disasters, raising concerns that it could worsen housing market conditions for non-homeowners and have a negative impact on the economy.

1️⃣ Easy to Understand

The 'mortgage rate,' which is important for people looking to buy a home in the United States, has recently risen significantly. The interest rate for fixed-rate loans that don't change for 30 years has exceeded 7%. Let's understand this situation with an everyday example.

For instance, let's assume there's a Mr. Kim who wants to purchase a $400,000 (about 500 million won) home in the United States. He plans to make a 20% down payment of $80,000 and borrow the remaining $320,000 as a 30-year fixed-rate loan. When the interest rate was 6%, the monthly payment was about $1,919, but with the rate rising to 7%, the monthly payment increases to about $2,129—an increase of $210 (about 260,000 won per month). The total interest paid over 30 years increases by approximately $36,000 (about 45 million won).

This 1 percentage point increase in interest rates is a significant burden for home buyers. The increase in monthly payments reduces purchasing power, which has a cooling effect on the overall housing market. People who were planning to buy homes postpone or abandon their plans, affecting related industries such as home sellers, builders, and real estate brokers.

Ultimately, the rise in US mortgage rates is not just an issue for the housing market, but an important matter that can affect the overall US economy and, by extension, the global economy through reduced consumption and depression in related industries.

2️⃣ Economic Terms

📕 Mortgage Loan

A mortgage loan is a long-term loan borrowed from a financial institution using housing as collateral.

• In the United States, it is commonly called a 'mortgage,' and the loan period is typically set for 15 or 30 years.
• There are fixed-rate and adjustable-rate options, with the 30-year fixed-rate mortgage being the most commonly used in the United States.

📕 Fixed Rate

A fixed rate is a method where the interest rate does not change during the loan period but remains fixed at the initially contracted rate.

• It is advantageous during periods of rising interest rates as it avoids the risk of interest rate fluctuations and allows for stable financial planning.
• However, it has the disadvantage of potentially paying higher interest than adjustable rates during periods of falling interest rates.

📕 Treasury Yield

Treasury yield is the return on bonds issued by the government and serves as the benchmark for determining loan interest rates.

• In particular, the 10-year US Treasury yield has a high correlation with mortgage rates.
• It fluctuates due to various factors such as inflation outlook, economic growth rates, and central bank policies.

📕 Housing Affordability

Housing affordability is an indicator showing the possibility of home purchase relative to household income.

• It is determined by factors such as housing prices, interest rates, and household income, and affordability decreases when interest rates rise.
• If the housing affordability index decreases, the housing market's vitality may decrease, potentially having a negative impact on the overall economy.

3️⃣ Principles and Economic Outlook

💡 Structural Causes of Interest Rate Increase

• The rise in US mortgage rates is the result of multiple structural factors working together. First, the most direct cause is the recent surge in 10-year US Treasury yields. Treasury yields are influenced by inflation concerns, the Fed's monetary policy direction, and economic growth outlook, with recent strong economic indicators and persistent inflation acting as upward pressure on rates. Second, increased housing construction costs are also an important factor. Construction costs have risen significantly due to increases in raw material prices, labor shortages, and supply chain disruptions, leading to higher housing prices and increased loan risks. Third, home insurance premiums are surging due to increased natural disasters from climate change. With the increasing frequency and intensity of floods, wildfires, and hurricanes, home insurance premiums have more than doubled in some areas. These factors are putting additional upward pressure on mortgage rates.

💡 Impact on the Housing Market and Economy

• The rise in mortgage rates has a wide-ranging impact on the housing market and the overall economy. First, rising rates directly increase the cost of home purchases. Even when buying the same house, a 1 percentage point increase in interest rates significantly increases the total interest paid over 30 years. This reduces the purchasing power of potential buyers, leading to contraction in housing demand. Additionally, existing homeowners are reluctant to relocate due to the 'rate lock-in' phenomenon caused by high interest rates. They postpone moving to avoid giving up their current low-interest loans for new high-interest ones. This housing market downturn negatively affects related industries such as construction, real estate brokerage, and furniture and appliance industries, potentially leading to reduced consumption and lower economic growth rates. This impact is significant because the housing sector plays a large role in the US economy.

💡 Spillover Effects on the Global Economy and Korea

• The rise in US mortgage rates affects the global economy and the Korean economy through various channels. First, a slowdown in the US economy directly harms global economic growth. As the world's largest consumer market, a decrease in US consumers' purchasing power could impact countries with high export dependency. Second, rising US interest rates could increase volatility in global financial markets. When US rates rise, dollar assets become more attractive, potentially causing capital outflows from emerging markets and resulting in exchange rate instability and financial insecurity. Third, export-oriented countries like Korea are affected by reduced exports due to US economic slowdown, increased financial market volatility, and exchange rate fluctuations. In Korea's case specifically, rising US interest rates could also put upward pressure on domestic interest rates, affecting domestic mortgage rates. However, the degree of impact may vary depending on each country's economic situation and policy response, with some assessments suggesting that Korea has the ability to absorb shocks due to its relatively sound financial system and current account surplus.

4️⃣ In Conclusion

The 30-year fixed mortgage rate in the US surpassing 7% carries significance beyond a simple numerical change. It is an important variable that can affect the soundness of the US housing market and the overall economy.

The background to the interest rate rise includes complex factors such as Treasury yield increases, construction cost increases, and insurance premium surges related to natural disasters. These structural problems are difficult to resolve in the short term, suggesting that the high-interest environment is likely to continue for the time being.

Rising mortgage rates directly increase the burden on home buyers, leading to reduced purchasing power and decreased market activity. This can particularly impact young generations and the middle class who are trying to buy their first homes. There are concerns that this could further deepen the asset gap between generations.

A downturn in the US housing market can have cascading effects on related industries such as construction, real estate brokerage, and home furnishing, potentially leading to employment and consumption contraction. Economic slowdown in the United States, the world's largest economy, will also have negative spillover effects on the global economy, particularly countries with high export dependency.

Investors should pay attention to these changes and closely monitor the Federal Reserve's monetary policy direction, inflation trends, and housing market indicators. They should also consider these factors when adjusting investment portfolios, as they can affect the performance of housing-related industries and consumer goods companies.

Policymakers need a balanced approach that prevents excessive cooling of the housing market while controlling inflation. In particular, efforts are required to improve housing accessibility by strengthening support policies for low-income groups and first-time homebuyers.

Ultimately, while the rise in US mortgage rates will act as market adjustment pressure in the short term, in the long term, it could be an opportunity for more sustainable housing market development. If speculative demand decreases and a market centered on actual demand forms, it could contribute to building a healthy housing ecosystem.