Mortgage rates have climbed almost two percentage points since the start of the year – the fastest pace in nearly four decades – making it even more expensive for potential buyers in an already overheated market.
Whether these rates continue to rise will largely depend on the effectiveness of the Federal Reserve’s attempts to bring inflation under control quickly.
The Fed is expected to raise its benchmark interest rate by half a percentage point on Wednesday as the inflation rate, driven largely by soaring energy and food prices, continues to rise. Since the benchmark rate, known as the federal funds rate, directly and indirectly affects the cost of many loans, the increase is intended to increase borrowing costs, slow demand and dampen price increases. price.
Mortgage rates do not move in parallel with the federal funds rate. They tend to follow the yield of 10-year Treasury bills, which is influenced by various factors, including inflation expectations.
“Inflation is the center of the wheel,” said Greg McBride, chief financial analyst at Bankrate.com. The risk is that rates will continue to rise “unless and until we get lasting evidence that inflation has peaked and is starting to come down,” he added.
Although still low by historical standards, the rate on a 30-year fixed-rate mortgage averaged 5.10% for the week ending April 28, according to Freddie Mac. That’s their highest point in 12 years and up from 2.98% a year ago. The average was 3.11% at the end of 2021.
Higher mortgage rates, combined with soaring home prices – the median existing home was about 15% more expensive in March compared to a year earlier – have eroded what potential buyers can afford.
It also dampened demand: Applications fell to their lowest level since 2018, according to the Mortgage Bankers Association.
“Potential home buyers have retreated this spring as they continue to face limited options of homes for sale as well as higher costs due to rising mortgage rates and prices,” the agency said. last week Joel Kan, associate vice president of the group’s economic and industrial forecasts.
With a 10% down payment on the median home, the typical monthly mortgage payment is now $1,834, up 49% from $1,235 a year ago, taking into account both price and higher rates. And that doesn’t include other non-negotiable items, like property taxes, homeowners insurance, and mortgage insurance, which are often required on down payments of less than 20%.
These costs add up over time. In a recent study, Jacob Channel, principal economist analyst at LendingTree, using data from its online marketplace, found that the year-to-date rate hike could cost homebuyers an additional $93,000, in average, over the life of a 30-year Mortgage.