The 30-year fixed mortgage rate rose to 5% this week for the first time in more than a decade.
According to data released Thursday by Freddie Mac, the 30-year fixed-rate average climbed to 5% with an average 0.8 point. (A point is a fee paid to a lender equal to 1% of the loan amount. It is in addition to the interest rate.) It was 4.72% a week ago and 3.04% a year ago. The last time the 30-year fixed average was above 5% was February 2011.
Freddie Mac, the federally chartered mortgage investor, aggregates rates from around 80 lenders across the country to come up with weekly national averages. The survey is based on home purchase mortgages. Rates for refinances may be different. It uses rates for high-quality borrowers with strong credit scores and large down payments. Because of the criteria, these rates are not available to every borrower.
According to Freddie Mac, the 15-year fixed-rate average jumped to 4.17% with an average 0.9 point. It was 3.91% a week ago and 2.35% a year ago. The five-year adjustable rate average rose to 3.69% with an average 0.3 point. It was 3.56% a week ago and 2.8% a year ago.
"The Freddie Mac fixed rate for a 30-year loan maintained its momentum this week, as markets reacted to the latest data on consumer prices, which accelerated in March to a pace not seen since 1981," George Ratiu, manager of economic research at Realtor.com, said. "After approaching 2.8% early this week, the 10-year Treasury retreated slightly, as investors equated the slight moderation in the core consumer price index with a signal that we've hit peak inflation. However, hopes of a cooling may be premature, given the jump in producer prices, which advanced at the fastest pace on record."
An online survey of rates in Arkansas on Thursday showed that some lenders are charging slightly more than the Freddie Mac national average for conventional 30 year mortgage loans. U.S. Bank listed rates of 5.25% to 5.327% and Arvest Bank promoted a rate range of 5.5% to %5.579. Nerdwallet.com on Thursday reported that the average rate in Arkansas on Thursday was 4.923%.
The hit to buyer affordability since the beginning of the year is equivalent to an additional 20% increase in home prices, said Greg McBride, chief financial analyst at Bankrate.com.
"For homebuyers under age 35, a 5% rate is uncharted territory," he said. "The speed at which rates are going up will cool the housing market by reducing demand. But that may only mean housing goes from sizzling to warm. Demand still exceeds what is a record-low level of supply."
UPWARD PRESSURE
Mortgage rates are being driven higher by rising inflation. The consumer price index, released Tuesday by the Bureau of Labor Statistics, showed prices grew 8.5% in March compared with a year ago. It was the largest annual increase since December 1981. On Wednesday, the BLS released the March producer price index, which tracks prices paid by wholesalers. It climbed 11.2% from a year ago, its biggest gain since 2010.
Inflation causes fixed-income investments such as bonds to lose value, which is why investors demand more in return for holding them. When yields rise sharply, it's because investors want to be paid more for lending long term.
The 10-year Treasury hit 2.79% on Monday. It crept back down the past few days, closing at 2.7% on Wednesday. The 10-year yield started the year at 1.63% and a little more than a month ago was below 2%.
Because mortgage rates tend to follow the same path as long-term bonds, they have been trending higher as well.
"Inflation pushes mortgage rates upward in two ways," Holden Lewis, home and mortgage expert at NerdWallet, said. "First, interest is the price we pay for money, and the price of money goes up like everything else. Second, the Federal Reserve raises interest rates to control inflation. Those forces are working together to lift mortgage rates higher."
It is not only rising rates that are making home loans more expensive. As of April 1, the Federal Housing Finance Agency implemented a fee increase for some Fannie Mae and Freddie Mac home loans. Mortgages that FHFA considers "high balance" or mortgages for a second home are now more expensive.
High-balance loans are mortgages above the conforming national baseline limit ($647,200). Fees for high-balance loans increased between 0.25 and 0.75%, tiered by loan-to-value ratio. Fees for second home loans increased between 1.125 and 3.875%, tiered by loan-to-value ratio.
MORE TO COME
Bankrate.com, which puts out a weekly mortgage rate trend index, found more than half of the experts it surveyed expect rates to go up in the coming week.
"The Fed is in full-on sell mode of 10-year Treasury notes," Ken H. Johnson, real estate economist at Florida Atlantic University, said. "Last week over 20% of the volume in the 10-year market was Fed selling. With that amount of one-sided activity, long-term mortgage rates, which track the yields on 10-year Treasury notes, can only go up."
Meanwhile, mortgage applications fell again last week. The market composite index -- a measure of total loan application volume -- decreased 1.3% from a week earlier, according to Mortgage Bankers Association data.
The refinance index slid 5% and was down 62% from a year ago. Refinance application volume remains at its lowest level since spring 2019. The purchase index ticked up 1%. The refinance share of mortgage activity accounted for 37.1% of applications.
"Higher rates are increasing borrower interest in [adjustable rate mortgages]," Joel Kan, an MBA economist, said in a statement. "Their share of applications last week was at 7.4%, which was the highest share since June 2019. In a promising sign of strong purchase demand amidst affordability challenges, both conventional and government purchase applications increased."
The sudden jump in borrowing costs, in a market where buyers across the nation are already struggling to afford a home, would normally spell doom for home sales and housing prices. But in the unusual pandemic-recovery economy of rising wages, supply chain disruptions and changes in how Americans live and work, it's unclear how significant a difference higher rates will make.
Economists generally believe rising rates will cool the market a little, at least compared with the past two years of double-digit price gains. There are some early indications that expensive markets on the East and West coasts are already seeing a slight decline in buyer interest.
The problem, in the housing market and the broader economy, is that there isn't much to buy. The inventory of homes for sale remains extremely tight, with far more buyers than sellers. This means that even though rising rates will push many would-be homeowners out of the market or into a lower price range, there remains more demand than homes on the market.
The typical homebuyer's payment has gone up 35% in just a few weeks, according to Redfin, a national real estate brokerage. That burden comes on top of high prices for food, gas, cars, furniture and so much else.
On Thursday, Redfin said its index of homebuyer demand had declined 3% over the past month.
Information for this article was contributed by Kathy Orton of The Washington Post, Conor Dougherty of The New York Times and Prashant Gopal of Bloomberg News (TNS).