Mortgage rates spiked again this week, continuing to climb sharply, shutting out some would-be home buyers.
Freddie Mac said in a statement Thursday that the average rate on a 30-year loan was 5.3%, up from 5.27% last week and the highest since July 2009.
Rates track the yield on the 10-year U.S. Treasury note, which last week hit 3% for the first time since 2018. U.S. consumer prices rose more than expected in April, suggesting the Federal Reserve will need to work aggressively to curb inflation. Mortgage costs are expected to follow as the Federal Reserve raises its benchmark interest rate.
During what has traditionally been the busiest and most competitive season in the housing market, higher interest rates will put more pressure on buyers to close deals before loans become more expensive. Others have put off home searches after calculating they can’t afford larger mortgage bills.
At the current 30-year average, a borrower with a $600,000 mortgage would pay $3,332 a month, $768 more than at the end of last year.
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Greg McBride, chief financial analyst at Bankrate.com, said many cash buyers in the market, including switchers and real estate investors, are not sensitive to interest rates, so even if first-time buyers pull out, they will keep buying .
“The rise in mortgage rates since the start of the year has had the same impact on affordability as a rise in home prices of more than 20 per cent,” McBride said. “It will definitely moderate demand as many potential home buyers have been priced out. But as long as inventory remains low, rising interest rates won’t turn into a buyer’s market.”
Adjustable-rate mortgages are gaining popularity as a cheaper option. Last week, data from the Mortgage Bankers Association showed that ARMs, which have variable rates that reset at predetermined times based on the market, have accounted for the largest share of home loan applications since 2008.
Freddie Mac said the current five-year ARM average is 3.98%, up from 3.96% last week.
According to the Mortgage Bankers Association, an uptick in mortgage applications last week shows that buyers remain undeterred despite rising mortgage rates.
“Homebuyers continue to show resilience despite rising mortgage rates resulting in monthly payments up about a third from a year ago,” said Sam Khater, Freddie Mac’s chief economist.
He said several factors had contributed to this continued demand, including a large number of first-home buyers looking to buy. Also, spring is usually the peak buying season.
“In the coming months, we expect monetary policy and inflation to hit many consumers, denting buying demand and slowing house price growth,” Khater said.
Last week, the Fed announced it would raise the federal funds rate by half a percentage point, the largest increase since 2000, in an effort to curb inflation.
“As the Fed raises its target rate, mortgage rates continue to climb,” said Joel Berner, senior economic research analyst at Realtor.com.
Berner said Fed governors and the Biden administration have set their sights on lowering inflation. But with the consumer price index – a key inflation gauge – remaining high and major stock market indexes continuing their weekly slide, “the dirty word among U.S. economists and financiers is ‘recession.'”
Mortgage rates are not expected to drop significantly as long as regulators focus on containing inflation. For homebuyers, that means challenges will continue to mount, as listing prices remain at record highs and the number of homes for sale hovers near record lows.
“Rising living costs and falling investment values have made it harder to save for a down payment, while higher mortgage rates have made home borrowing more expensive,” Berner said.
He said some buyers were completely priced in by the market ahead of the busy summer season, which took some of the pressure off listing prices.
There are some early signs of a price slowdown, Berner said. Over the past two months, the percentage of listings with price cuts has increased compared to a year ago.