Mortgage rates pull back, but affordability concerns remain

·Personal finance writer
·4 min read

Mortgage rates pulled back this week, but elevated borrowing costs continue to stifle price-shocked homebuyers.

The rate on the 30-year fixed mortgage edged down to 5.25% from 5.3% last week, according to Freddie Mac. Still, the rate remains over 2 percentage points higher since the start of the year.

The moderate drop does little to relieve pressure on price-rattled homebuyers who are already facing tight inventory levels and declining affordability. Buyers that haven’t been put off by the recent jump in prices are racing to lock in rates before they surge higher. Meanwhile, homeowners are postponing refinance plans – the opportunity to snatch a lower rate long gone.

“Economic uncertainty is causing mortgage rate volatility,” said Sam Khater, Freddie Mac’s chief economist, in a press statement. “As a result, purchase demand is waning.”

Homebuyers scramble amid rate hikes

The volume of purchase applications fell by 12% – the first drop in three weeks — and are 15% lower than the same week a year ago, according to the Mortgage Bankers Association survey for the week ending May 13.

The trend underscores growing affordability concerns, as many buyers are at risk of being priced out by skyrocketing prices coupled with higher rates.

“The number of households interested in becoming homeowners remains high, despite waning confidence that now is a good time to buy,” Realtor.com chief economist, Danielle Hale, said in a press statement. “This is especially true among younger home shoppers, who are likely to be first-time buyers and are struggling to save for a down payment as rents continue to hit records.”

During an open house by Prudential Realtor Tracy Do, interested buyers, realtors and brokers make a steady stream of visitors in a California Bungalow in the Highland Park. Housing inventory has hit a low not seen since the bubble days. Bidding wars are erupting and agents are competing fiercely to represent the few sellers that do exist.  (Credit: Allen J. Schaben, Los Angeles Times via Getty Images)
During an open house by Prudential Realtor Tracy Do, interested buyers, realtors and brokers make a steady stream of visitors in a California Bungalow in the Highland Park. Housing inventory has hit a low not seen since the bubble days. Bidding wars are erupting and agents are competing fiercely to represent the few sellers that do exist. (Credit: Allen J. Schaben, Los Angeles Times via Getty Images)

The slowdown in housing activity is already visible. Existing home sales tumbled for the third consecutive month in April, according to the National Association of Realtors, slipping 2.4% month over month to a seasonally adjusted annual rate of 5.61 million. That’s down 5.9% from a year ago.

“Home sales will continue to decline” as mortgage rates increase, Lawrence Yun, chief economist at the National Association of Realtors, said on a press call Thursday.

According to NAR, the median listing price surged to a new record high of $425,000 last month, up 14.2% from April 2021. As a result, the cost of financing 80% of a typical home listing has jumped by almost 50% compared with a year ago.

To soften the financial blow, a growing number of buyers have turned to adjustable-rate mortgages (ARMs), which currently offer starting rates nearly a whole percentage point lower.

“More than ever, buyers should be laser-focused on planning for all the expenses that go into owning a home right now — think insurance, taxes, maintenance — and not just a mortgage,” Robert Heck, vice president of mortgage at Morty, told Yahoo Money. “If rising rates have cut into your affordability, take a look at what you can afford now. We’ve seen a number of buyers compromise successfully over the past month, which can be frustrating at the moment but help advance your longer term homeownership goals.”

A growing number of homeowners who could be selling are opting to stay put, according to the National Association of Realtors. Mortgage-holders that refinanced at record-low mortgage rates during the last two years are now hesitant to give up comfortable mortgage payments as rates top 5%. (Photo by Tim Boyle/Getty Images)
A growing number of homeowners who could be selling are opting to stay put, according to the National Association of Realtors. Mortgage-holders that refinanced at record-low mortgage rates during the last two years are now hesitant to give up comfortable mortgage payments as rates top 5%. (Credit: Tim Boyle, Getty Images)

‘Existing owners are rate locked-in’

As mortgage rates remain above 5%, some homeowners who could sell and trade up are staying put instead – many unwilling to give up their current low mortgage rate.

About 51% of U.S. homeowners have a mortgage rate under 4% – over a full point lower than this week’s 5.25%, according to a Redfin analysis of Federal Housing Finance Agency (FHFA) data from the fourth quarter of 2021. Additionally, one-third of all homeowners (32%), including folks without mortgages, have a mortgage rate under 4%.

“The lack of existing-home inventory may worsen as rates rise,” Mark Fleming, chief economist at First American, told Yahoo Money. “Existing owners are ‘rate locked-in’ when their existing rate is below the prevailing market rate. This places even more importance on homebuilding. You can’t buy what’s not for sale, but you can build it."

Homeowners also aren’t refinancing. The volume of refinance applications is 76% lower than a year ago, according to MBA.

Only 832,000 high-quality candidates could shave at least three-quarters of a point off their mortgage by refinancing at a rate of 5.27% recorded two weeks ago, according to figures mortgage technology and data provider Black Knight previously gave Yahoo Money.

“For borrowers looking to refinance, the current level of rates continues to be a significant disincentive,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting.

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

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