The 30-year mortgage averaged 5.10% in the week ending April 28, down from 5.11% the previous week, according to Freddie Mac. But it’s still well above the rate this time last year, when the 30-year average flat rate was 2.98%.
“The combination of rapid home price growth and the fastest increase in the mortgage rate in more than forty years is finally affecting purchase demand,” said Sam Khater, chief economist at Freddy Mac.
Khater said potential buyers are coping with the increasing cost of buying a home by shifting their home search away from coastal cities and looking to more affordable suburbs.
He said some buyers are turning to adjustable rate mortgages, where the interest rate is reset after a certain period of time. Last week, the average five-year adjustable rate mortgage tracked by Freddie Mac was 3.78%.
“We expect lower demand to soften home price growth to a more sustainable pace later this year,” Khater said.
The pace of rate growth stalled last week after a slight dip in 10-year Treasuries, said George Ratio, director of economic research at Realtor.com. US Treasuries – particularly 10-year Treasuries – are the vanguard of fixed-rate mortgages. When 10-year Treasury yields fall, mortgage rates tend to move that way as well.
“Treasury yields declined as investors worried about the worsening COVID-19 outbreak in China and widespread shutdowns,” he said. In addition, he said, commodity prices are witnessing another shock from the supply chain disruptions caused by the war in Ukraine.
“Inflation is likely to continue at a rapid pace for longer than expected, keeping pressure on mortgage rates over the medium term,” Ratio said.
Buyers are holding back
There are signs that higher interest rates are starting to affect the housing market.
Mortgage applications fell 8.3% last week compared to the previous week, according to the Mortgage Bankers Association. Mortgage applications to buy a home are down 17% from a year ago, and loan refinancing applications are down 71% from the same period last year.
In addition, the number of signed contracts to buy a home fell in March, marking a five-month decline, according to the National Association of Realtors, as lower inventory and higher home acquisition costs pushed buyers to the sidelines.
But with fewer buyers in the market, home prices are expected to fall in many areas.
“Markets reached their peak in prices early this spring, and the next few months are expected to witness a moderation in the pace of the rise, followed by stabilization in the fall,” Ratiou said.
“The good news is that for buyers frustrated by last year’s frenetic market, the shift toward a more natural landscape holds the promise of more homes to choose from, a slower pace of sales, and better prices.”
Low home affordability
However, cooling prices do not necessarily mean that the cost of home ownership will decrease.
The affordability of homebuyers waned in March, as the national average monthly mortgage payment rose 5% to $1,736 from $1,653 in February, according to the MBA.
This gave the typically active spring home buying season a mixed start, said Edward Seiler, associate vice president of housing economics and executive director of the Housing Research Institute of America.
“A healthy job market and strong wage gains drove demand across the country in March, but rapid growth in home prices and a rise in mortgage rates last month slowed purchase order activity,” he said.
Seiler said principal and interest payments to the typical borrower were $387 more in March than a year earlier.
“Rapid price hikes, very high inflation, low inventories, and mortgage rates now two percentage points higher than last year are all headwinds for the housing market in the coming months — especially for first-time buyers,” Zeiler said.