Michigan homebuyers are confronting another affordability squeeze as 30-year mortgage rates climb above 7%, while home prices remain nearly 6% higher than a year ago. The impact could extend beyond buyers to home builders, mortgage lenders and consumer spending across the state.

ANN ARBOR — Mortgage rates have surged above 7% for the first time since January 2025, delivering another financial blow to Michigan homebuyers already dealing with home prices that continue to rise.

Freddie Mac reported Thursday that the average 30-year fixed mortgage reached 7.03%, up from 6.95% the previous week and 6.30% a year ago.

The increase marks the fifth consecutive weekly rise. The average rate was just 6.66% on Aug. 27 before beginning its rapid climb.

For Michigan buyers, the timing is particularly difficult because home prices haven’t fallen to compensate for higher borrowing costs.

Michigan homes sold for a median $297,760 in August, up 6.3% from a year earlier, according to Redfin. Meanwhile, the number of homes sold declined 2.9%.

That means many buyers are confronting both higher home prices and sharply higher financing costs at the same time.

Anderson: Higher Rates Hit More Than Homebuyers

Michigan economist Patrick Anderson said the effects extend well beyond families shopping for homes.

“Higher borrowing rates hit Michigan homebuyers, home builders, and our mortgage lenders as well,” said Anderson, CEO of East Lansing-based Anderson Economic Group.

Anderson attributes today’s higher borrowing costs to a combination of federal fiscal policies, energy and trade costs, and Federal Reserve efforts to bring inflation under control.

“The higher rates are an unwelcome result of Biden-era overspending, Trump-era energy and tariff cost increases, and the Fed finally getting serious about inflation,” Anderson said.

Anderson’s assessment comes as Federal Reserve officials continue to express concern about persistent inflation.

The Fed recently raised its benchmark interest rate by a quarter percentage point to a range of 3.75% to 4%, and several Fed officials have indicated additional increases could be necessary if inflation doesn’t retreat toward the central bank’s 2% target.

Richmond Federal Reserve President Tom Barkin said this week that inflation pressures are no longer limited to energy and tariff-related shocks, with strong consumer demand and broader economic activity also contributing.

What A 7% Mortgage Costs

The difference between a 6% and 7%-plus mortgage may not sound enormous.

Over 30 years, it is.

Consider a buyer borrowing $300,000.

At 6%, principal and interest would be about $1,799 a month.

At 7%, the payment increases to approximately $1,996.

At 7.5%, it reaches approximately $2,098.

That’s nearly $300 more every month — about $3,600 a year — between a 6% and 7.5% mortgage, even though the buyer borrowed exactly the same amount of money.

And those numbers don’t include property taxes, homeowners insurance, mortgage insurance or association fees.

The problem becomes even larger for buyers financing $400,000 or $500,000 homes.

Nearly One-Third Of Michigan Households Already Housing-Burdened

Higher mortgage rates arrive when housing costs already consume a significant portion of Michigan household budgets.

Nearly 33% of Michigan households are housing-cost burdened, meaning they spend more than 30% of their income on housing expenses, according to an August analysis from the University of Michigan’s Poverty Solutions.

Michigan’s median household income is $72,336.

The U-M analysis also found that nearly 40% of Michigan residents struggle to afford basic necessities, including more than 26% of working households whose incomes are above the federal poverty line but still aren’t sufficient to cover their local cost of living.

Higher mortgage payments make that affordability equation even tougher.

Why Mortgage Rates Are Rising

The Federal Reserve doesn’t directly set mortgage rates.

Thirty-year mortgages are more closely influenced by longer-term bond markets, particularly yields on U.S. Treasury securities.

Those yields have surged as investors react to persistent inflation, strong economic data, energy prices and expectations that interest rates could remain elevated.

The 10-year Treasury yield recently climbed above 5%, levels not seen since before the 2008 financial crisis.

When investors demand higher returns to hold long-term Treasury securities, mortgage rates generally rise along with them.

That creates a chain reaction that can eventually reach Michigan households:

Inflation and economic pressures push bond yields higher. Higher bond yields push mortgage rates higher. Higher mortgage rates increase monthly housing costs.

The Mortgage Lock-In Problem

High rates also create another problem for Michigan’s housing market.

Millions of Americans refinanced or purchased homes when mortgage rates were around 3% or 4%.

Selling that house today could mean surrendering an extremely inexpensive mortgage and replacing it with a loan costing around 7%.

That gives homeowners a powerful financial incentive to stay put — the so-called mortgage lock-in effect.

Michigan therefore can experience two forces simultaneously.

Higher rates discourage potential buyers, reducing demand.

But homeowners reluctant to surrender low-rate mortgages may also keep homes off the market, restricting supply and helping support prices.

Indeed, Michigan home prices increased 6.3% over the past year even as the number of homes sold declined.

First-Time Buyers Face The Biggest Challenge

The squeeze can be especially difficult for first-time buyers.

Existing homeowners may have accumulated substantial equity that can be used for a large down payment on their next house. First-time buyers generally don’t have that advantage.

Higher mortgage rates also reduce how much house a buyer can afford.

Someone who qualified for a particular monthly payment when rates were near 6% may need to purchase a substantially less expensive home to maintain that payment when rates exceed 7%.

That can force buyers toward smaller houses, different communities — or continued renting.

Housing Slowdown Can Ripple Through Michigan Economy

Housing isn’t an isolated industry.

Home sales generate business for real estate agents, mortgage lenders, title companies, inspectors and insurance companies.

New-home construction supports builders, contractors and suppliers.

And buyers typically spend additional money after purchasing a house on appliances, furniture, renovations, landscaping and other goods and services.

That means a prolonged housing slowdown can ripple through other sectors of Michigan’s economy — one reason Anderson says higher borrowing rates affect home builders and mortgage lenders as well as buyers.

What Happens Next?

The direction of mortgage rates will depend heavily on inflation, economic growth, energy prices, Federal Reserve policy and the bond market.

If inflation subsides and Treasury yields retreat, mortgage rates could move lower.

But if inflation remains stubborn and investors conclude interest rates will have to stay elevated — or rise further — mortgage rates could remain above 7%.

For Michigan families hoping to buy a home, the affordability equation has changed quickly.

A house doesn’t have to become more expensive for homeownership to cost substantially more.

Sometimes all it takes is a higher interest rate.