Mortgage rates soar past 4.5%

Mortgage rates are closing in on 5% faster than anticipated, hitting their highest level since December 2018 this week.

The rate on the average 30-year fixed mortgage increased to 4.67%, up from 4.42% a week ago, according to Freddie Mac. Mortgage rates have increased three-quarters of a point this month – the largest three-week jump since May 1987 — and gained 1.56 percentage points since the start of the year.

The climbing rates are a massive blow to would-be homebuyers who are facing the worst affordability conditions entering the already red-hot spring housing market. Rates have also all but eliminated refinance incentives for homeowners.

“Shoppers still aiming to fulfill new years resolutions of a home purchase this year may feel like the housing market is completely different from when they set their intention," Danielle Hale, chief economist for Realtor.com, told Yahoo Money. "Some home shoppers, especially first-time homebuyers, who tend to have smaller down payments and no equity from prior home ownership, will find that their already stretched budgets reach the max, and we may see some shoppers postpone buying plans because they are priced out."

Many buyers are likely ‘feeling the squeeze’ of rising rates

As the spring home-buying season is set to begin, potential buyers aren’t backing down – even as rates climb.

The volume of mortgage applications for home purchases remained little changed from last week, increasing by 1%, according to the Mortgage Bankers Association (MBA) survey for the week ending March 25. Still, the purchase share of activity was 10% lower than the same week last year.

“Those shopping for homes are struggling with not only higher and more volatile mortgage rates, but also an ongoing shortage of homes on the market,” said Mike Fratantoni, MBA's senior vice president and chief economist. “Given these hurdles, it appears to be promising news that purchase application volume has not declined, as many potential buyers are likely feeling the squeeze in their purchasing power from the jump in rates."

Accelerating home prices have become a thorn in the side of many homebuyers.

The latest S&P/Case Shiller report underscored how competitive the 2022 housing market has been. Home prices increased 19.2% in January as homebuyers scrambled to beat rising rates. At the end of the year, the 30-year fixed rate mortgage averaged 3.11%. By the final week of January, rates had jumped to 3.55% – as record low inventory levels drove home prices higher.

“Rising mortgage rates are an added consideration for buyers, when rising costs are already widespread for other budget items such as groceries and gas," said Hale. "With rents continuing to rise at double-digit pace nationwide and in many markets, buyers remain motivated.”

Rents increased 17.1% year-over-year in February, according to Realtor.com data, with the median asking rent for 0-2 bedroom units hitting $1,792. Last year, a 1-bedroom would have been $232 less. That increase in rent makes it tougher for potential homebuyers to save for a downpayment, Hale said.

And at a 4.67% rate, the monthly payment for a median-priced house of $405,000 — with 20% down —is more than $440 — or 36% more — compared with a year ago, according to Realtor.com data.

“The steep increase in costs is likely to price out some buyers, and may lead to more options and less competition for home shoppers who can afford to stick with their home search,” said Hale.

Homeowners are staying put

On the other end, refinance incentives have plummeted.

The refinance share of mortgage activity decreased to 40.6% of applications, down from 44.8% the previous week. According to the MBA, refi incentives are expected to continue its steep decline. Compared with last year, application volume for refinancing is down 60%.

At 4.67%, only 1.65 million high-quality candidates could shave at least three-quarters of a point off their mortgage by refinancing, according to figures mortgage technology and data provider Black Knight gave Yahoo Money. That's a sharp contrast to the 11 million who could refinance at the start of the year, and down from 2 million candidates last week.

If there’s one positive about soaring prices, it's that homeowners have gained a record amount of equity in the past few years that they can use to leverage their next purchase. But some borrowers may be “more hesitant” to tap their home equity amid increasing rates, according to Freddie Mac deputy chief economist Len Kiefer.

Debbie Boyd, CEO of DLB Financial Services, agrees.

“A lot of people are doing a cash out refinance, paying off a lot of debt, or they're buying investment properties," Boyd said. "But they're staying put."

‘Rates could hit 5% in a matter of weeks’

As investors continue to digest the impact of the Federal Reserve’s measures to tighten monetary policy in the face of runaway inflation, mortgage rates will likely continue to climb.

“Continuing on the recent trajectory would have mortgage rates hitting 5% within a matter of weeks, but longer term rates have receded somewhat this week as investors reassess the economic outlook,” Hale said. “This could slow the pace at which mortgage rates reach that 5% milestone, granting a temporary reprieve to home shoppers hoping to find a home and lock in a rate before they trend higher.”

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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