According to Freddie Mac, the 30-year fixed-rate mortgage averaged 5.10% in the week ended April 28, down from 5.11% the week before. But it’s still significantly higher than the rate this time last year, when the 30-year fixed rate averaged 2.98%.
“The combination of rapid house price growth and the fastest rise in mortgage rates in over forty years is finally having an impact on buying demand,” said Sam Khater, Freddie Mac’s chief economist.
Khater said prospective buyers are coping with the increased cost of buying a home by shifting their housing searches away from coastal cities and into more affordable suburbs.
Some buyers, he said, are switching to adjustable-rate mortgages, where the interest rate resets after a period of time. Last week, the five-year adjustable rate mortgage tracked by Freddie Mac averaged 3.78%.
“We expect the demand slowdown to moderate home price growth to a more sustainable pace later this year,” Khater said.
The pace of interest rate growth faltered last week after a slight decline in 10-year government bonds, said George Ratiu, manager of economic research at Realtor.com. US Treasuries – particularly the 10-year Treasury – are a poster child for fixed rate mortgages. When 10-year Treasury yields fall, mortgage rates also tend to move in that direction.
“Treasury yield fell as investors worried about China’s worsening Covid outbreak and large-scale lockdowns,” he said. In addition, he said, commodity prices are suffering another shock from supply chain disruptions due to the war in Ukraine.
“Inflation is likely to continue at a rapid pace for longer than expected, keeping mortgage rates under pressure in the medium term,” Ratiu said.
Buyers withdraw
There are signs that higher interest rates are starting to weigh on the housing market.
Mortgage applications last week were down 8.3% from the previous week, according to the Mortgage Bankers Association. Mortgage applications to buy a home were down 17% from a year ago and applications to refinance a loan were down 71% from this time last year.
Additionally, the number of contracts signed to buy a home declined in March, marking five straight months of decline, according to the National Association of Realtors, as low inventories and higher homebuying costs have marginalized buyers.
However, with fewer buyers in the market, property prices are expected to cool in many areas.
“Markets peaked early this spring and a slowdown in the pace of appreciation is expected in the coming months, followed by flattening out in the autumn,” Ratiu said.
“The good news is that for buyers frustrated by last year’s hectic market, the shift to a more normal landscape promises more homes to choose from, a slower pace of sales and better prices.”
Home affordability is falling
Cool prices don’t necessarily mean that home ownership costs will come down, however.
Affordability for homebuyers fell in March, with the national median monthly mortgage payment rising 5% to $1,736 from $1,653 in February, according to the MBA.
That’s gotten a mixed start to the normally busy spring homebuying season, said Edward Seiler, MBA’s associate vice president of Housing Economics and executive director of the Research Institute for Housing America.
“Healthy job markets and robust wage increases fueled demand across the country in March, but rapid home price growth and the rise in mortgage rates over the past month have slowed demand activity,” he said.
A typical borrower’s principal and interest payment in March was $387 higher than a year earlier, Seiler said.
“Rapid price increases, sky-high inflation, low inventories and mortgage rates now two percentage points higher than last year are headwinds for the housing market in the coming months – especially for first-time buyers,” said Seiler.