Mortgage rates pause their rapid ascent, but homebuyers remain discouraged

The rapid rise in mortgage rates finally paused this week, but the increase in borrowing costs since the start of the year have already dampened homebuyer activity.

The average rate on the 30-year fixed mortgage edged down to 5.10% from 5.11% last week, according to Freddie Mac. Mortgage rates have jumped over 2 percentage points since the beginning of 2022 on expected interest rate hikes by the Federal Reserve to tame runaway inflation.

Still, the rapid pace of surging home prices and rates have visibly cooled sales, as prospective buyers struggle to keep up with swelling costs amid tight inventory conditions. The hike in rates has also abruptly shut down refinance opportunities for most homeowners.

“The combination of swift home price growth and the fastest mortgage rate increase in over forty years is affecting purchase demand,” said Sam Khater, Freddie Mac’s chief economist. “Homebuyers navigating the current environment are coping in a variety of ways, including switching to adjustable-rate mortgages, moving away from expensive coastal cities, and looking to more affordable suburbs.”

Prospective homebuyers have been dealt a costly hand with both borrowing costs and home prices on the rise.

While a handful of buyers raced to make a purchase before rates increased further, many others stepped back altogether from the once-sizzling housing market. Mortgage applications for purchases fell 8% on a seasonally adjusted basis from a week earlier, according to the Mortgage Bankers Association (MBA) survey for the week ending April 22.

“The drop in purchase applications was evident across all loan types,” Joel Kan, MBA’s associate vice president of economic and industry forecasting, said in a press statement. “The recent decrease in purchase applications is an indication of potential weakness in home sales in the coming months.”

The number of homes under contract — a leading indicator for the housing market’s health — fell for the fifth straight month in March, according to the National Association of Realtors. Closed sales of previously owned homes also dropped in March along with sales of new homes.

“Real estate markets are shifting under the weight of record-high prices and rising mortgage rates,” George Ratiu, manager of economic research at Realtor.com, said in a press statement. “This is leaving many homebuyers unable to get a foot in the homeownership door due to being priced out of the market.”

According to data from Realtor.com, buyers of a median-price home are looking at a monthly mortgage payment that is almost 50% higher than it was a year ago, adding an extra $560 to their monthly expenses.

To reduce costs, more borrowers are applying for adjustable-rate mortgages, or ARMs. The ARM share of applications was over 9% by loan count and 17% based on dollar volume last week, according to the MBA, double the amount three months ago.

With mortgage rates over 5%, the chance to refinance at a lower rate is long gone for most homeowners.

Applications for refinances decreased 9% from the previous week and was 71% lower than the same week a year ago, according to the MBA. The refinance share of activity declined to 35% of total applications from 35.7% the previous week.

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% two weeks ago, down from 11 million candidates at the start of the year, according to figures mortgage technology and data provider Black Knight previously gave Yahoo Money.

“Homeowners who bought their property last year or before, and locked in a rate around 3% or below, are likely breathing a sigh of relief that their monthly housing costs are offering a buffer from the rapid pace of inflation,” Ratiu told Yahoo Money.

While mortgage rates held steady this week, economists anticipate further increases in the coming months.

The central bank is expected to make an aggressive move and lift its benchmark interest rate by a half-point next week. The Fed also plans to reduce its purchases of mortgage-back securities – another move that kept mortgage borrowing costs near record lows for the last two years.

NAR Chief Economist Lawrence Yun expects the rate on the 30-year fixed mortgage to hit 5.3% by the fourth quarter and 5.4% by 2023. One silver lining to the slowdown in sales from rising rates and values is that housing prices may finally break their blistering pace of the past year, according to Ratiu, and potentially flatten some in the fall.

“The good news is that for buyers frustrated by the past year’s frenzied market, the shift toward a more normal landscape holds the promise of more homes to choose from, a slower pace of sales, and better prices,” he said.

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

Read the latest personal finance trends and news from Yahoo Money.

Follow Yahoo Finance on Twitter, Instagram, YouTube, Facebook, Flipboard, and LinkedIn.