Mortgage Rates Surge to 7% After Moody’s U.S. Credit Downgrade

• Moody’s downgraded the U.S. sovereign credit rating from Aa1 to Aaa, citing high government debt and interest-payment ratios, making it the last major agency to end the nation’s triple-A status after S&P Global Ratings’ 2011 downgrade.
• The downgrade pushed bond prices up, increasing the 30-year fixed-rate mortgage rate to 6.99%, driven by rising 10-year Treasury yields.
• Elevated mortgage rates and record-high home prices have worsened the U.S. housing affordability crisis, with 2024 home sales hitting a 30-year low and activity remaining “sluggish” through March, per National Association of Realtors’ chief economist Lawrence Yun.

The U.S. housing market is grappling with intensified affordability challenges following a surge in mortgage rates, triggered by Moody’s downgrade of the nation’s sovereign credit rating from Aa1 to Aaa, marking the final major credit agency to remove the triple-A rating after S&P Global Ratings’ downgrade in 2011. On Monday morning, the downgrade exerted upward pressure on bond prices, driving the 30-year fixed-rate mortgage rate to 6.99%, as reported by Mortgage News Daily. This increase aligns with rising Treasury yields, particularly the 10-year yield, which mortgage rates closely track, amplifying financial strain for prospective homebuyers.

Moody’s justified its decision by pointing to elevated government debt and interest-payment ratios, which have outpaced those of similarly rated sovereigns, signaling fiscal vulnerabilities that ripple through financial markets. The housing sector, already burdened by record-high home prices, faces a deepening crisis, with home sales dropping to a 30-year low in 2024. Lawrence Yun, chief economist at the National Association of Realtors, described market activity through March as “sluggish,” despite the spring season typically being the peak period for residential real estate transactions.

High mortgage rates, now at levels not seen in years, exacerbate the affordability gap, pushing homeownership further out of reach for many Americans. The interplay between Treasury yields and mortgage rates reflects broader economic dynamics, where fiscal policy and creditworthiness directly impact borrowing costs. Historical trends show that sustained high rates, as seen in the early 1980s, can suppress housing demand for prolonged periods, and current conditions suggest a similar trajectory. Yun’s observations underscore a market stalled by economic headwinds, with limited relief in sight as government debt concerns persist. The convergence of these factor – rising rates, declining sales, and fiscal pressures – paints a challenging outlook for the U.S. housing market, testing the resilience of both buyers and the broader economy.

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