Mortgage rates hit their highest level since April 2019 this week, following a sharp increase in 10-year Treasury yield.
The rate on the average 30-year fixed rate mortgage jumped to 4.16 %, up from 3.85% a week ago, according to Freddie Mac. The 15-year fixed rate — a common refinance option — also surged, averaging 3.39% from 3.09% last week.
The more than quarter-point hike in rates in the last week is a blow to many homeowners who may have waited too long to refinance their loan. It's also yet another setback for buyers who are facing some of the worst affordability conditions, as prices push higher amid stubbornly low inventory for homes for sale.
"The potent fuel that propelled real estate markets to new highs over the past couple of years is evaporating,” said George Ratiu, Realtor.com manager of economic research.
Rates have marched up notably in recent weeks as rattled markets responded to inflation concerns that ratcheted up even more after the U.S. banned oil imports from Russia.
The Federal Reserve’s move to hike short-term interest rates by a quarter-point on Wednesday, with at least five more increases expected this year, is unlikely to slow inflation anytime soon, according to Ratiu, given the ongoing supply chain issues and the effect of higher fuel costs on consumer prices. The ongoing uncertainty over the war in Ukraine is also helping to boost the 10-year Treasury yield, which fixed mortgage rates tend to follow.
"The Federal Reserve raising short-term rates and signaling further increases means mortgage rates should continue to rise over the course of the year," said Sam Khater, Freddie Mac’s chief economist. “While home purchase demand has moderated, it remains competitive due to low existing inventory, suggesting high housing price pressures will continue during the spring home-buying season.”
‘Days of sub-3% interest rates are firmly behind us’
The U.S. housing market has been contending with historically low inventory, which has squeezed millions of first-time homebuyers out of a demanding market.
The year started with a shortage of 5.8 million new single-family homes, a result of a decade worth of under-building. As a result, the phenomenon has created what Ratiu coined as the “renter generation” as many millennials who are entering prime home-buying years are subsequently priced out.
“With millions of millennials and Gen Z coming of age and seeking to buy homes, a large wave of demand is finding insufficient inventory and pushing prices to new highs,” he said.
At today’s rate, the buyer of a median-priced home priced will face monthly mortgage payments that are more than $340 higher than a year ago, according to Ratiu. Rising mortgage rates and inflation pressures will inevitably limit the pool of buyers.
“Record-low mortgage rates helped many first-time buyers stretch their budgets in 2020 and 2021," Ratiu said. But "the days of sub-3% interest rates are firmly behind us, and we have yet to solve the market fundamentals of supply and demand.”
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.