The rapid rise in mortgage rates isn’t stopping, with the rate on the most common home loan hitting the highest point since December 2018 this week.
The rate on the 30-year fixed mortgage increased to 4.72% from 4.67% last week, according to Freddie Mac. The rate has climbed nearly a full percentage point since the first week of March and is up 1.5 points since the start of the year. It’s also the fastest three-month rise since May of 1994.
The increases are nothing but bad news for homebuyers who must contend with double-digit home price growth, record low inventory, and runaway inflation eating at their budgets. And most homeowners who hesitated on refinancing into the historically low rates of the past two years are out of luck now.
“For real estate markets, the sharp jump in mortgage rates over the past quarter indicates a decisive turning point,” said George Ratiu, Realtor.com’s manager of economic research, in a emailed statement. “For many American families, today’s mortgage rates are closing the door on being able to afford to buy a home this spring.”
What’s driving up mortgage rates?
Fixed mortgage rates tend to follow the yield on the 10-year Treasury, which surged to 2.6% earlier this week — the highest level in four years — as investors fled bonds on expectations of higher interest rates.
“Investors are digesting this week’s remarks by a number of Federal Reserve presidents which echo Chairman Powell’s stated concerns that inflation is on an aggressive path which threatens to derail the economy by cutting consumer spending,” Ratiu said.
Meeting minutes released this week from the central bank showed that Fed officials planned to shrink their bond holdings, which likely would push the 10-year Treasury yield higher.
Buyers bear the brunt
On the ground, that means buying a home is getting more expensive.
For instance, the monthly payment on a median-priced home today is nearly $500 higher than just one year ago, a 40% jump, according to Ratiu.
“The increase in the cost of financing a home is outgunning the 8% yearly rate of inflation, the 15% rise in home prices, and the 17% advance in rents,” he added.
Signs are emerging that some buyers have called it quits.
In February, the sales of previously owned homes dropped 7.2%. The volume of mortgage applications to purchase a home slipped 3% last week versus the one prior, according to the Mortgage Bankers Association (MBA) with a steeper 8% drop in applications for mortgages backed by the Federal Housing Administration, a popular choice among first-time homebuyers and those with smaller down payments.
That and an increase in the average purchase loan size indicate “first-time buyers being disproportionately impacted by supply and affordability challenges,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting, in a press statement.
Homeowners left out
The refinance boom that characterized the last two years is largely over.
The volume of refinance applications dropped 10% from the previous week, according to MBA, and is 62% lower than a year ago. The refinance share of overall mortgage activity fell to 38.8% of total applications from 40.6% the previous week.
The number of homeowners who could benefit from a traditional refinance to lower their rate is rapidly shrinking. At last week’s rate of 4.67%, only 1.65 million high-quality candidates could shave at least three-quarters of a point off their mortgage by refinancing, according to figures mortgage technology and data provider Black Knight gave Yahoo Money. At the start of the year, that figure was 11 million.
Those owners who did refinance in the last two years also have little incentive to sell their homes as rates rise, pinching the already record-low inventory levels that buyers are facing.
“Existing homeowners — who make up about 40% of home sales — may be reluctant to sell because they feel the so-called ‘lock-in’ effect,” according to a BofA Global Research note. “There is greater disincentive to move and replace their current mortgagee that likely has a lower fixed rate lowering housing turnover.”
The march upward in rates is likely not over.
On top of the Fed’s anticipated moves, the labor shortage that’s driving strong employment gains along with rising prices is boosting costs for lenders and mortgage originators, Ratiu said, also leading to higher rates.
“The bottom line is that mortgage rates are on course to surpass 5%, a level not seen since February 2011,” Ratiu said, “when the typical home in the U.S. was priced at just $166,000 — less than half the price of today’s typical home.”
Janna is the personal finance editor for Yahoo Money. Follow her on Twitter @JannaHerron.
Mortgage applications and refinancing continue to decline as rates climb, according to data from the Mortgage Banker’s Association (MBA).
“The 30-year fixed mortgage rate increased for the fourth consecutive week to 4.90 percent and is now more than 1.5 percentage points higher than a year ago,” Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting, wrote in a statement. “As higher rates reduce the incentive to refinance, application volume dropped to its lowest level since the spring of 2019.”
Housing demand remains high on the back of a hot job market and wage growth: The U.S. economy recorded solid job growth as payrolls jumped by 431,000 in March and the unemployment rate dropped to 3.6% – its lowest level since Feb. 2020.
But the lack of housing inventory, which resulted in an elevated average purchase price, has restrained the market.
“The elevated average purchase loan size, and steeper 8 percent drop in FHA purchase applications, are both indicative of first-time buyers being disproportionately impacted by supply and affordability challenges,” Kan added.
Refinancing activity also dropped to 38.8% – a loss of 1.8% from the previous week, and tumbled over 12% from the same period the previous year.
One area that saw an increase of activity was the adjustable-rate mortgage (ARM) share, which rose to 6.8% of total activity. An ARM will provide a lower initial rate, which might explain the increase of activity: homebuyers will gamble that they can refinance at a later date or that rates might remain low at that time.
The MBA survey covers over 75% of all U.S. retail residential mortgage applications, and has been conducted weekly since 1990.
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