A sluggish housing market for most of last year began to heat up as the calendar turned to 2024.

However, in recent weeks the market has cooled down again.

A rise in mortgage rates explains the slowdown in the housing market, experts told ABC News, noting that high home prices are out of reach for most consumers when combined with high borrowing costs.

The jump in mortgage rates is due to persistently high inflation that has delayed interest rate cuts at the Federal Reserve, experts said. Mortgage rates track 10-year Treasury yields, which are very sensitive to the Federal Reserve’s benchmark rate.

“High mortgage rates and high housing prices have led to an affordability problem of a magnitude we haven’t seen in decades,” Susan Wachter, a real estate professor at the University’s Wharton School of Business, told ABC News. of Pennsylvania.

The average interest rate for a 30-year fixed mortgage has soared to 6.9%, rebounding after a steady decline late last year, according to a Freddie Mac report Thursday.

Meanwhile, home sales have plummeted. Mortgage purchase applications fell 10% from the previous week, data from the Mortgage Bankers Association showed on Wednesday.

“Existing home sales have fallen off a cliff,” Lu Liu, also a professor at the Wharton School of the University of Pennsylvania, told ABC News.

The real estate market dynamics date back to a highly anticipated announcement in December, during which the central bank revealed expectations of interest rate cuts in 2024.

The signal sparked a surge of optimism among major market players, who anticipated the end of the Federal Reserve’s fight against inflation and the fall in interest rates from near-historic highs. In turn, 10-year Treasury yields fell and mortgage rates soon followed suit.

Inflation, however, has refused to cooperate. Stronger-than-expected economic performance and resilient consumer demand have helped drive price increases, keeping them above the Federal Reserve’s target rate.

“The strengthening of the economy is a surprise,” Wachter said. “This raises questions about the Federal Reserve’s next steps.”

PHOTO: Federal Reserve Chairman Jerome Powell holds a news conference after a meeting of the Federal Open Market Committee in Washington, January 31, 2024.

Federal Reserve Chairman Jerome Powell holds a news conference after a meeting of the Federal Open Market Committee in Washington, January 31, 2024.

Julia Nikhinson/AFP via Getty Images

Consumer prices rose 3.1% in January compared with a year ago, slowing markedly from the previous month but missing expectations for an even greater cooling, a Bureau of Labor Statistics report showed early in this month.

Inflation is well below last year’s peak of 9%, but remains more than a percentage point above the Federal Reserve’s target rate of 2%.

“The inflation rate is reflected in the 10-year Treasury rate, which drives up mortgages,” Wachter said.

When the Federal Reserve began the rise in bond yields with its first rate hike of the current series in March 2022, the average 30-year fixed mortgage rate stood at just 4.45%. The average mortgage is now almost 2.5 percentage points higher.

Each one percentage point increase in the mortgage rate can add thousands of dollars, or even tens of thousands, in additional costs each year, depending on the price of the home, according to Rocket Mortgage.

Rising mortgage rates have frozen the housing market in part because home prices remain high, Liu said. Potential home buyers would prefer to stay with mortgages that have comparatively low rates rather than upgrade to higher rates that would exacerbate high home prices, she added.

“Many people are holding back from moving or selling,” Liu said.

Observers would expect home prices to fall amid weak consumer demand, but persistently high housing costs may be due to a reluctance among potential buyers to put their own homes on the market first, Liu added.

“It’s a bit of a puzzle why housing prices have remained stable or even increased,” Liu said. “Homeowners may be buying, but not selling.”

By Sam