Mortgage rates climbed higher above 7% this week, marking a 22-year high and shattering the American Dream for many.
The average 30-year mortgage rate jumped to 7.23% this week, up from last week's 7.09%, according to Freddie Mac on Thursday. That is the highest rate point since June 2001 when rates were at 7.24%.
Today's rate environment is bruising first-time homebuyers who are facing many other struggles, including high prices and minimal inventory. The resulting unaffordability is also increasing the wealth gap between those who own and those who remain stuck on the sidelines.
Read more: What the Fed rate hike means for mortgage rates and loans
"It's going to create a huge social divide," Lawrence Yun, chief economist with the National Association of Realtors, told Yahoo Finance Live (video above) about mortgage rates. "Homeowners are smiling big, while the renters feel like their dream is out of reach, frustrated that other people are getting the housing wealth while they are left out paying higher rents each month.”
‘Shut out of the market’
Many buyers have thrown in the towel.
The volume of mortgage applications for a home purchase was the smallest in 28 years last week, according to an index from the Mortgage Bankers Association released Wednesday. The seasonally adjusted index dropped by 5% for the week ending Aug. 18 from the previous week, and was 30% percent lower than a year ago on an unadjusted basis.
"As rates have surged past 7% and homebuying costs have risen yet again, home purchase mortgage applications have eased, suggesting that at least some potential buyers have been shut out of the market," Danielle Hale, Realtor.com’s chief economist, said.
Adding to expensive borrowing costs is the slim inventory, also something elevated mortgage rates are responsible for. Many homeowners won’t sell their homes because they would have to trade their very low mortgage rate for a much higher one.
That limited inventory coming has pushed prices higher, exacerbating affordability even more for would-be buyers. Homeowners, though, are enjoying equity gains.
"When you go to people and say the value of your house went up, homeowners think it's a wonderful thing," John Sabelhaus, a fellow at Brookings Institution and former chief of microeconomic surveys at the Federal Reserve Board, told Yahoo Finance. "But in effect, the economy is worse off because if you're never going to sell that house, it doesn't matter what the value is. And for people who haven't yet bought a house, they're the ones who are negatively impacted."
'Persistent social divide'
Renters missed — and continue to miss — the opportunity to accumulate housing equity from rising home prices, with homeowners acquiring 40 times more in their net worth than renters in the last decade, according to a study by the National Association of Realtors, regardless of socioeconomic class.
Since 2012, low-income homeowners have seen an average gain of $98,900 in their homes; middle-income homeowners saw an average of $122,100 during the same period; and high-income owners accrued $150,800, the study found.
Although renting can be better under various circumstances and owning a home comes with add-on costs, being forced to rent due to high borrowing costs still could further set back renters who are already struggling to save for a house because asking rents are also near their all-time highs.
"We don't want to create this persistent social divide," Yun said. "So one way to ensure that there is a path towards ownership is to make sure that the economy is working correctly."
That may depend on what the Federal Reserve does next. Fed Chair Jerome Powell is expected to speak on what’s next for interest rates this Friday in Jackson Hole, Wyoming, which would help dictate where mortgage rates will head for the remainder of 2023 and the beginning of 2024.
Rates so far have jumped as the Fed hiked its benchmark rate over the last year and a half to combat inflation. Recent economic data has come in stronger than expected and potentially too robust for the Fed to curb its efforts, a problem for homebuyers pursuing the American Dream.
"The American Dream is alive," Yun said. "It is whether or not the Fed will permit that dream to be realized."
Rebecca Chen is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).
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