Moody’s downgrade of U.S. government debt rattled the markets and caused mortgage rates to climb sharply.
By lowering America’s credit rating from AAA to Aa1, Moody’s became the final major agency to strip the U.S. of its top-tier credit score. S&P Global Ratings made a similar move back in 2011, during a different fiscal crisis.
The immediate impact of the downgrade rippled through bond markets early Monday. Yields on long-term government debt rose, causing the average rate on a 30-year fixed mortgage to spike by 12 basis points, reaching 7.04%, according to Mortgage News Daily. It later edged down slightly, closing at 6.99%.
Moody’s pointed to rising federal debt and a troubling ratio of interest payments relative to government income—both of which are worse than what’s seen in other similarly rated nations—as the key drivers behind its decision.
Since mortgage rates generally track the direction of Treasury yields, the uptick in the 10-year yield created upward momentum for the 30-year fixed mortgage rate as well, explained Jake Krimmel, senior economist at Realtor.com, in an interview with MarketWatch.
Krimmel also noted that higher mortgage rates are “really not ideal for prospective buyers.”
Home affordability continues to deteriorate. Steep borrowing costs, combined with sky-high home prices, have made it increasingly difficult for many Americans to purchase a home, as shown in the chart below.
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The real estate market remains stuck in a slump. In 2024, home sales hit their lowest point in three decades. Despite the spring typically being the busiest season for buying and selling, activity has been “sluggish,” said Lawrence Yun, chief economist at the National Association of Realtors, regarding the housing market through March.
{Matzav.com}