FXT Financial Focus (Asia-Pacific 09/17)U.S. Mortgage Rates Rise, Housing Recovery Faces Pressure

The U.S. housing market had been expected to gradually recover in 2026, but mortgage rates approaching 7% are creating renewed pressure. Freddie Mac data showed the average 30-year fixed mortgage rate rose to 6.76% last week, while daily market rates later moved above 7%. More than the 7% threshold itself, the rapid increase could weigh on buyer sentiment, prompting more households to delay purchases or mortgage applications.

Higher mortgage costs are closely linked to rising long-term U.S. Treasury yields, with the 10-year yield recently climbing above 5%. Energy prices, inflation concerns and fiscal deficits have all contributed to higher long-term borrowing costs. Markets are also watching Federal Reserve policy. If inflation expectations stabilize, long-term yields could gradually ease, while persistent price pressures may keep mortgage rates elevated.

High borrowing costs are already weighing further on housing activity. National Association of Realtors data showed existing-home sales fell 2% in August to an annualized rate of around 3.98 million units, the lowest since June last year. Mortgage rates briefly dropped below 6% earlier this year, supporting demand, but financing costs have since rebounded. Zillow has also cut its 2026 home-sales growth forecast from 4.3% to 1.3%, pointing to a weaker recovery than previously expected.

The employment and income environment is also making households more cautious about taking on long-term debt. Hiring has cooled compared with 2023, wage growth is more moderate and economic uncertainty has increased. With monthly mortgage payments remaining high, potential buyers are becoming more selective, while price reductions in some areas have yet to generate a clear improvement in viewings or transactions.

One positive factor is that U.S. housing inventory has risen significantly from 2023 levels and is gradually approaching pre-pandemic norms. Many homeowners still hold mortgages with rates of 2% to 3%, reducing their incentive to move. As waiting periods lengthen, some households are returning their properties to the market, although the low-rate lock-in effect continues to discourage many owners from selling and taking on more expensive new mortgages.

The new-home market is facing similar pressure. Builders have used mortgage-rate incentives to attract buyers, but higher market rates make these promotions increasingly costly and squeeze profit margins. If elevated mortgage rates persist, builders may slow construction and investment. Weak housing transactions could also weigh on related spending such as furniture, renovations and household appliances, spreading the impact to broader economic activity.

From FXTs perspective, the main challenge facing the U.S. housing market is shifting from limited supply toward high financing costs and declining affordability. Rising inventory has improved supply conditions, but mortgage rates near 7% are offsetting much of that benefit. Going forward, long-term Treasury yields, inflation, employment, wage growth and residential construction will be key factors determining whether the housing market can return to a more stable recovery path.