Mortgage rates jumped past the 5% threshold this week, the highest level since April 2010, continuing its stubborn climb as the spring selling season kicks off.
The rate on the 30-year fixed mortgage increased to 5.11%, up from 5% a week ago, according to Freddie Mac. Since the first week of March, rates have increased 1.35 basis points and are already a surprising 2 percentage points higher than the end of last year.
The swift increase in rates adds even more pressure to would-be homebuyers who are already facing a historic shortage of properties and declining affordability. Buyers that haven’t been stymied from the surge in prices are looking to lock in rates before they continue their ascent — while any chance for homeowners to refinance at lower rates have abruptly ended.
“Mortgage rates increased for the seventh consecutive week, as Treasury yields continued to rise,” Sam Khater, Freddie Mac’s chief economist, told Yahoo Money. “While springtime is typically the busiest homebuying season, the upswing has caused some volatility in demand. It continues to be a seller’s market, but buyers who remain interested in purchasing a home may find that competition has moderately softened.”
Home sales drop at the entry-level
The decline in mortgage affordability has begun to weigh heavily on existing home sales ahead of the spring selling season.
Existing home sales fell for the second consecutive month in March, according to the National Association of Realtors. Month-over-month sales for existing homes slipped 2.7% in March to a seasonally adjusted annual rate of 5.77 million, and were down 4.5% from a year ago — when the annual sales rate was just above 6 million.
At the same time, sales were down in three of the four major U.S. regions, but remained little changed in the West. According to Lawrence Yun, NAR’s chief economist, entry-level homebuyers are likely to hesitate on plans to purchase as their affordability wanes in light of surging home prices and the added pressure of rate hikes.
“The housing market is starting to feel the impact of sharply rising mortgage rates and higher inflation taking a hit on purchasing power,” Yun said in a statement. “Still, homes are selling rapidly, and home price gains remain in the double digits.”
As a result of the brief slow in demand, the inventory of unsold existing homes sat at 950,000 by the end of March. According to NAR, that amount of unsold inventory would support at least 2 months of sales activity at the present sales pace, a boost from 1.7 months in February.
“With the cost of financing a home about 40% higher than a year ago, demand for homes is visibly cooling, as many first-time buyers find themselves unable to qualify for a mortgage on a home that meets their needs,” George Ratiu, Realtor.com manager of economic research, told Yahoo Money. “While wages are seeing strong gains due to the significant labor market shortage, they continue to lag behind fast-paced inflation. Buyers who weren’t able to lock their rate are finding themselves unable to afford the much higher payment on today’s homes.”
With a 20% down payment, the monthly payment on a median priced home is $563 more per month than it would have been last year, adding up to more than $6,700 per year, an increase of 47%, Ratiu said.
The hike in rates has made other loans more attractive to entry-level borrowers looking to save cash, as the share of ARM applications last week jumped 8.5%, hitting its highest level since 2019, according to the Mortgage Bankers Association (MBA) survey for the week ending April 15. Government-backed loans favored by first-time buyers also registered increases as borrowers seek relief from record high home prices.
Still, the median price for existing homes in March was $375,300, up 15% from $326,300 a year ago. With the price of rents also increasing 17%, many first-time homebuyers have to carefully look at their budgets and may have to pause any plans for purchase this spring.
“It’s not surprising that sales have been dropping sharply at the entry-level compared to a year ago, however we’re beginning to see the combination of tight inventory and rising rates taking a toll on sales in the midrange of the market as well,” Ratiu said.
Refinance opportunities are gone
As mortgage rates continue their stubborn ascent, refinance activity has abruptly shut off.
The refinance index dropped 8% from the previous week and was 68% lower than the same week one year ago. According to the MBA, the decline in rate-and-term refi activity caused the refi index to fall for the sixth consecutive week — decreasing to 35.7% of total applications from 37.1% the week prior.
While a majority of homeowners took advantage of the refi boom during the last two years, those that have waited to snag a lower rate may have missed the opportunity.
Only 1.34 million high-quality candidates could shave at least three-quarters of a point off their mortgage by refinancing when rates hit 5% last week, down from 1.65 million candidates three weeks ago and 11 million at the start of the year, according to figures mortgage technology and data provider Black Knight previously gave Yahoo Money.
On average, these homeowners could save $316 per month if they refinance at today’s rates.
Gabriella is a reporter for Yahoo Money.
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