The new year brought little cheer for prospective U.S. homebuyers, as mortgage rates surged to their highest level in six months.

The average interest rate on 30-year fixed-rate mortgages with conforming loan balances of $766,550 or less climbed to 6.97% in the week ending Dec. 27, 2024, up from 6.75% the previous week, according to data released Thursday by the Mortgage Bankers Association.

This marks the steepest rates since early July, as long-term Treasury yields remain elevated following the Federal Reserve's hawkish monetary stance.

Notably, mortgage rates, which had trended lower for much of the first half of 2024, are now 21 basis points higher than this time last year, flipping the script on what had been a relatively friendly market for borrowers.

The surge in mortgage rates reflects broader shifts in financial markets, with long-dated Treasury yields rising alongside the Federal Open Market Committee's (FOMC) projections of fewer than-expected interest rate cuts.

Mortgage Applications Tumble 12.6%

With borrowing costs approaching the psychologically significant 7% threshold, mortgage activity took a nosedive. The MBA reported that mortgage applications fell 12.6% during the same week, compounding a 10.7% decline from the previous period. Seasonally adjusted, this leaves mortgage volumes at their lowest level in 10 months.

The sharp drop suggests that higher rates are squeezing demand, with many prospective buyers either unable or unwilling to lock in mortgages under such unfavorable conditions.

Labor Market Shows Resilience

On the flip side, labor market data offered a glimmer of optimism, as initial jobless claims fell to 211,000 in the week ending Dec. 28, down from 219,000 the previous week and beating market expectations of 222,000.

Continuing claims, which track those already receiving unemployment benefits, also dipped to 1.844 million, the lowest level since late September and below forecasts of 1.890 million. The steady decline in claims suggests that the U.S. job market remains robust in the face of rising borrowing costs.

Market Reactions

Thursday delivered a dose of optimism for markets as risk sentiment rebounded sharply ahead of the first trading session of the new year.

Following Tuesday's selloff, major equity futures jumped in early trading. As of 8:40 a.m. ET, contracts on the S&P 500 climbed 1%. Meanwhile, futures tied to the tech-heavy Nasdaq 100 jumped 1.2%.

Meanwhile, the U.S. dollar index (DXY) — as tracked by the Invesco DB USD Index Bullish Fund ETF (NYSE:UUP) — rose 0.3% to 108.80 levels, reaching the highest since November 2022.

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