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7% mortgage rates are back following credit downgrade 

After weeks of relative stability, the 30-year fixed-rate mortgage surged as treasury yields rose on the heels of the May 16 announcement.

May 19, 2025
2 mins

Moody's May 16 announcement that it has downgraded the U.S.'s credit rating has resulted in a jump in mortgage rates during the peak period of the spring homebuying season.

The 30-year fixed-rate mortgage averaged 7.04% the morning of May 19, according to Mortgage News Daily. Though rates have plateaued in recent weeks, the average has generally hovered just below 7% following the Trump administration's April 2 tariff announcements.

In its report, the rating agency estimated that the current tax cut proposals that the administration and Congress are floating would add $4 trillion to the federal deficit in the next decade. Moody's is the third major credit agency to knock the U.S. rating down a notch from Aaa — the highest score — to Aa1.

"While we recognize the US' significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics," Moody's said in a statement.

The ripple effect: Moody's announcement caused a drop in the stock market when it opened on May 19. It also pushed up 10-year and 30-year treasury yields, which generally impact mortgage rates.

The Federal Reserve has been cautious about interest rates amid recent tariff announcements and general economic concerns. Earlier this month, Fed Chair Jerome Powell said he "couldn't confidently say" whether there will be rate cuts this year. After Moody's downgrade, Atlanta Federal Reserve President Raphael Bostic said he is leaning toward just one rate cut in 2025.

"I worry a lot about the inflation side, and mainly because we're seeing expectations move in a troublesome way," he told CNBC on May 19. "That will make our job harder."

Home sales stay sluggish: This latest mortgage rate jump comes at a tough time for the housing market. Redfin estimates that existing home sales stalled in April, with an annualized level of 4.196 million sales. That's down from April 2024, when mortgage rates were also in the 7% range. 

Pending sales similarly declined in April, suggesting that May could be another slow month for completed sales.

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