Mortgage rates fell again this week for the third straight time, but sky-high home prices continue to keep price-conscious buyers at bay.
The rate on the 30-year fixed rate mortgage edged down to 5.09% from 5.10% last week, according to Freddie Mac. Still, rates remain almost 2 percentage points higher than the end of last year.
Despite the pullback, declining affordability and a continued shortage of properties are casting many first-time buyers out of the market. Buyers who haven’t been put off by rising borrowing costs are locking rates as fast as they can, while homeowners are holding tight to their ultra-low rates, shelving refinance plans for another day.
“The changes we’ve been seeing in a downward direction are very minimal,” Jason Sharon, owner and mortgage broker at Home Loans Inc., told Yahoo Money. “You’re talking about maybe a $1 month difference, so it’s not a big deal and may not sway buyers right now.”
Case in point: The share of purchase applications fell for the fourth consecutive week, down 2% on an unadjusted basis compared with the previous week, and is roughly 13% lower from two weeks ago, according to the Mortgage Bankers Association survey for the week ending May 27.
The lack of supply and affordability has left purchase applications 14% lower than the same week a year ago, according to MBA, with purchase activity decreasing to its lowest level since December 2018.
Higher borrowing costs are compounding the effects of surging home prices, which accelerated at a record pace in March when rates began their ascent in earnest.
At the current mortgage rate of 5.09%, the monthly bill on the median existing-home price of $447,000 with a 20% down payment would be $1,989. A year ago, that monthly payment would have been $434 lower on the same home when interest rates averaged 2.99%.
The monthly payment would have been $659 less on the median-priced home of $380,000 back then, meaning it costs more than 50% more to buy a median-priced home.
“I’ve had hundreds of clients subsequently reduce their prequalification amount based on what’s happening with rates,” Sharon said. “They’ve fallen in love with a property in the $350,000 range and now have to reset their standards because they no longer can afford a monthly payment.”
Homeowners are locked in
With mortgage rates above 5%, homeowners are delaying plans to put their homes for sale – opting to keep their current mortgage after many refinanced to historically low rates during the pandemic.
That is exacerbating the inventory crisis. While inventory of homes for sale increased for the first time since June 2019, growing by 8% over the past year — the number of active listings is still down 48.5% compared with May 2020, according to Realtor.com.
“I had a friend that was prequalified and got into contract and once they realized how much the interest rate was going to be, they backed out of the contract,” Sharon said “They actually gave up their earnest money to stay in their house because the cost of moving up was so significant, they decided it wasn’t worth it.”
Meanwhile, homeowners also aren’t refinancing.
The volume of refinance applications decreased to 31.5%, down from 32.3% the previous week, according to the MBA. Overall, the refi index was 75% under last year’s level. According to Redfin, about 51% of U.S. homeowners have a mortgage under 4% – over a full point lower than this week's 5.09%.
“For homeowners who haven’t refinanced, the window is largely closed,” Danielle Hale, chief economist at Realtor.com, told Yahoo Money. “Unless a home was purchased or refinanced before 2009.”
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.