Homebuyers can’t catch a break. Mortgage rates are edging closer to 6%.
The rate on the 30-year fixed mortgage increased to 5.81% this week from 5.78% last week, according to Freddie Mac. That rate remains at the highest level since November 2008 and is more than 2.5 points higher since the start of the year.
Surging mortgage rates have put both homeowners and potential buyers in a tough spot. While tight inventory levels and double-digit price gains threaten to price first-time buyers out of the market, rising rates have also left some homeowners hesitant to trade up or tap into their equity gains.
“The combination of rising rates and high home prices is the likely driver of recent declines in existing home sales,” said Sam Khater, Freddie Mac’s chief economist, in a statement. “However, in reality many potential homebuyers are still interested in purchasing a home, keeping the market competitive but leveling off the last two years of red-hot activity.”
The slight increase in rates comes after the largest one-week gain since 1987 last week following the Federal Reserve’s hike of its benchmark interest rate by three-quarters of a point and its signaling of another increase of 1.75 percentage points over the rest of the year.
According to industry experts, the actions by the Fed are inevitably rippling through the housing market – cooling off the once-blistering market as summer begins.
“We’re already seeing some signs of waning demand in certain markets,” Robert Heck, vice president of mortgage at Morty, told Yahoo Money. “And this [Fed hike] would continue that trend, breaking the high-demand, low-inventory cycle we’ve seen over the past two years.”
Some eager buyers are racing to lock in rates before they move higher.
The volume of purchase mortgage applications increased for the second straight week, up 4.1% on a seasonally adjusted basis from one week ago, according to the Mortgage Bankers Association survey for the week ending June 17.
The spike in purchase applications was driven mainly by conventional applications and a rebound in adjustable-rate loan applications — the latter’s share of total applications coming in over 10%.
Still, purchase activity remains down 10% versus a year ago as low inventory and affordability issues strain buyers.
“Even if demand slows, the reality is that there will always be buyers in the market,” Heck said, “and right now many of those would-be buyers are likely waiting to see what happens and biding their time.”
Affordability concerns continue to linger. According to Realtor.com, rising mortgage rates have increased the monthly mortgage payment on a median-priced home an estimated 60% more than last year. The median monthly mortgage payment has jumped by $513 from the start of the year through May, according to a recent report from MBA.
“Most of my buyers aren’t worried about rates, they see it as more of an affordability concern,” Adriana Perezchica, real estate broker and owner at Via Real Estate, told Yahoo Money, noting that homes for sale in Washington state averaged over $1 million.
“It’s just very expensive to buy any home now,” she said.
To draw in price-strapped buyers, some homeowners are lowering their listing price, according to data from Redfin, which called on sellers to list sooner than later and price slightly below recent sales in their neighborhoods.
“During the pandemic-fueled housing frenzy, sellers could count on getting more money for their income than a neighbor who sold last month,” Redfin Chief Economist Daryl Fairweather said in a prepared statement. “Those days are over. Now, you should expect to get a bit less than what your neighbor got a month ago – and in a month, you may get less than you would now.”
Eventually, the housing market should adjust back to normal, according to George Ratiu, Realtor.com manager of economic research.
“Home price gains are also slowing as a new growing number of home sellers are boostings the supply chain,” Ratiu said. “The upside is that eventually we should see a healthier environment with more options and better value for many buyers.”
Homeowners, too, have seen their opportunities shrink.
Surging mortgage rates made refinancing at a lower rate an impossibility for most homeowners. According to the MBA, the refinance activity is down 77% from a year ago.
“People who refinanced in the last three years [if they refinanced today], it would double their interest rate,” Perezchica said.
It’s also getting more expensive for homeowners to tap their record-high equity. U.S. home equity reached $27.8 trillion during the first quarter of the year, according to the Federal Reserve, but homeowners aren’t biting.
“I think that time kind of already passed,” Perezchica said. “People could have just probably tapped into some of their equity with very low interest rates. Now, they would have to think twice.”
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.