The housing market is showing more signs of slowing. Purchase applications fell 1% last week compared to the previous week and volume is now 14% lower than a year ago, the Mortgage Bankers Association’s latest index shows.

Overall, mortgage demand, which includes applications for refinancing and home purchases, has fallen to its lowest level since December 2018.

Mortgage rates have been moving higher over recent weeks, leading to the softening demand, analysts say. The average contract interest rate for 30-year fixed-rate mortgage loans with a 20% down payment was 5.33% last week, the MBA reports.

Rising interest rates and home prices have been dampening housing affordability, at least for some price segments. “Demand is high at the upper end of the market, and the supply and affordability challenges are not as detrimental to these borrowers as they are to first-time buyers,” says Joel Kan, an MBA economist.

The average contract interest rate for a 30-year fixed-rate mortgage with a jumbo loan balance—that is, greater than $647,200—fell to 4.93% last week from 5.02%, the MBA reports.

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Seventy percent of recent home buyers say they rushed their property purchase due to market pressure, according to a new survey of more than 1,000 consumers conducted by MoneyWise. Rising home prices and mortgage rates made many buyers speed up their timelines, the survey notes.

The speed of their decisions may later lead to some regrets, particularly when it comes to the mortgage. Seventy-eight percent of respondents with adjustable-rate mortgages say they regret their purchase decision. Fifty-five percent of those with a fixed rate feel the same, according to the survey.

Adjustable-rate mortgages are growing more popular as home buyers look for a cushion to offset rising rates. ARMs tend to have lower introductory rates, typically for five or seven years, but then reset to possibly higher mortgage payments later on.

Respondents to the MoneyWise survey also show some regrets about their loan terms. Seventy-one percent of recent home buyers who gravitated toward a 15-year loan say they regretted their decision. Those with a 30-year fixed-rate mortgage had the least regrets.

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The interest rate for the 30-year fixed-rate mortgage averaged 5.09% this week, continuing to inch down slightly. Still, rates are up significantly compared to a year ago. Due to the higher rates, home buyers need to earn about $30,000 more if they want to buy the typical home now compared to a year ago, Nadia Evangelou, National Association of REALTORS®’ senior economist and director of forecasting, writes on the association’s blog.

The higher rates are slowing the housing market. Mixed with higher home prices, home buyers are facing escalating costs that is affecting affordability. Existing-home sales have dropped for the last three months, according to NAR’s data.

“Heading into the summer, the potential homebuyer pool has shrunk, supply is on the rise, and the housing market is normalizing,” notes Sam Khater, Freddie Mac’s chief economist. “This is welcome news following unprecedented market tightness over the last couple years.”

Freddie Mac reports the following national averages with mortgage rates for the week ending June 2:

• 30-year fixed-rate mortgages: averaged 5.09%, with an average 0.8 point, falling from last week’s 5.10% average. A year ago, 30-year rates averaged 2.99%.
• 15-year fixed-rate mortgages: averaged 4.32%, with an average 0.8 point, rising slightly from last week’s 4.31% average. A year ago, 15-year rates averaged 2.27%.
• 5-year hybrid adjustable-rate mortgages: averaged 4.04%, with an average 0.3 point, dropping from last week’s 4.20% average. A year ago, 5-year ARMs averaged 2.64%.

Freddie Mac reports commitment rates along with average points to better reflect the total upfront costs of obtaining the mortgage.

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Mortgage applications dropped 6.5% last week, and demand reached the lowest point in 22 years, the Mortgage Bankers Association reported Wednesday. The index reflects applications for refinancings and home purchases.

Mortgage applications for a home purchase, a gauge of homebuying, dropped 7% for the week and are now 21% lower than a year ago, the MBA reports. Refinance applications dropped another 6% this week and are 75% lower than the same week a year ago.

Rising mortgage rates have been chipping away at affordability. The average contract interest rate for a 30-year fixed-rate mortgage with a 20% down payment rose to 5.40% compared to 5.22% the previous week, the MBA reports.

Mortgage rates are still low by historical standards. But a year ago, the 30-year fixed-rate mortgage averaged below 3%. Home buyers are also facing higher home prices that are up by double-digit percentages annually.

“The purchase market has suffered from persistently low housing inventory and the jump in mortgage rates over the past two months,” says Joel Kan, an MBA economist. “These worsening affordability challenges have been particularly hard on prospective first-time buyers.”

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The reversal after declines over the last three weeks has economists closely watching for the Fed’s anticipated rate hike next week.

Following three weeks of declines, mortgage rates reversed course and headed back up this week. The 30-year fixed-rate mortgage averaged 5.23% for the week ending June 9; a year ago, it averaged below 3%.

Increased economic activity and incoming inflation data were behind the most recent rate increases this week, says Sam Khater, Freddie Mac’s chief economist. “The housing market is incredibly rate sensitive, so as mortgage rates increase suddenly, demand again is pulling back,” he says. “The material decline in purchase activity combined with the rising supply of homes for sale will cause a deceleration in price growth to more normal levels, providing some relief for buyers still interested in purchasing a home.”

Fed’s Anticipated Rate Hike Looms

Economists will watch the Federal Reserve’s actions closely this coming week. The central bank is largely expected to raise its key benchmark rate at its next meeting, June 14-15.

“Ahead of May’s inflation reading, investors are concerned about inflation and the impact of an upcoming half-percentage point rate hike from the Federal Reserve next week,” Nadia Evangelou, senior economist and director of forecasting for the National Association of REALTORS®, writes on the association’s blog. However, “the upcoming rate hike will likely have a smaller impact on mortgage rates this time.”

In March, when the Federal Reserve raised its short-term interest rates, mortgage rates surged 80 basis points in the following three weeks, Evangelou notes. The 30-year fixed-rate mortgage jumped from 3.85% to 4.67% by the end of March. In May, when the Federal Reserve raised its interest rates even more aggressively, mortgage rates rose by less than 20 basis points. By the end of May, the 30-year fixed-rate mortgage averaged 5.10%.

“It seems that mortgage rates have already priced in some of the effects of the upcoming Fed’s rate hikes,” Evangelou explains. She is forecasting mortgage rates to average 5.6% to 5.7% by late 2022.

Snapshot of Mortgage Rates

Freddie Mac reports the following national averages with mortgage rates for the week ending June 9:

• 30-year fixed-rate mortgages: averaged 5.23%, with an average 0.9 point, increasing from last week’s 5.09% average. Last year at this time, 30-year rates averaged 2.96%.
• 15-year fixed-rate mortgages: averaged 4.38%, with an average 0.8 point, rising slightly from last week’s 4.32% average. A year ago, 15-year rates averaged 2.23%.
• 5-year hybrid adjustable-rate mortgages: averaged 4.12%, with an average 0.3 point, increasing from last week’s 4.04% average. A year ago, 5-year ARMs averaged 2.55%.

Freddie Mac reports commitment rates along with average points to better reflect the total upfront cost of obtaining the mortgage.

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The Federal Reserve’s move to raise its benchmark rate by three-quarters of a percentage point—the largest increase since 1994—could put more upward pressure on near-6% mortgage rates and sideline more home buyers, says NAR Chief Economist Lawrence Yun.

The Federal Reserve unleashed another hike to its short-term benchmark rate Wednesday. The increase, the Fed’s largest since 1994, likely will have an impact on the housing market, economists say. The Fed’s key rate often influences mortgage rates, though it doesn’t directly affect them. Rates are moving at a much faster clip than most housing analysts forecast.

On Wednesday, the central bank’s Federal Open Market Committee voted to increase its benchmark funds rate by three-quarters of a percentage point to help tame inflation, which is at a 40-year high. Banks use the Fed’s rate as a benchmark for what they charge one another for short-term borrowing. The Fed’s latest hike sets a “big increase in interest rates and means several more rounds of rate hikes are on the way in upcoming months,” says Lawrence Yun, chief economist of the National Association of REALTORS®.

So far this year, the short-term Fed funds rate has jumped by 175 basis points. The 30-year fixed-rate mortgage has jumped even more—by nearly 300 basis points. For a $300,000 mortgage, the monthly payment has increased from $1,265 in December to $1,800 today, Yun says.

“That’s painful and, consequently, will shrink the buyer pool,” Yun says. “Home sales have recently been trending down toward 2019 figures. Sales could fall even further, with some inventory sitting on the market for more than a month like in pre-pandemic days. Pricing a listed home properly will, therefore, be the key to attracting buyers.” Mortgage rates will stabilize when consumer price inflation starts to fall, Yun adds.

Rising Mortgage Rates

Last week, the 30-year fixed-rate mortgage averaged 5.23%, according to Freddie Mac. A year ago, rates averaged 2.96%. By some measures, mortgage rates were just shy of 6%—at 5.99%—on Wednesday, according to Bankrate.com’s national survey. “Consumers haven’t seen mortgage rates above 6% since 2008,” Greg Schwartz, CEO and founder of mortgage lender Tomo, told Bankrate.com. “The pace of this move is what’s most concerning, as consumers’ buying power evaporated quicker than any time in recent memory. Further, volatility in rates may not decrease anytime soon either.”

Ali Wolf, chief economist at Zonda, offers an example of the impact: Affording a $316,000 home with a mortgage rate of 6% is about equal to paying for a $450,000 home with a 3% rate.

More aspiring home buyers are getting priced out. In response, mortgage applications, a gauge of homebuying demand, have been falling by double-digits. “Mortgage rates going forward will continue to be responsive to changes in expectations around the Fed’s policy path as well as inflation expectations,” says Ruben Gonzalez, chief economist for Keller Williams. “The housing market is still extremely tight, with inventory levels remaining near historic lows, leaving room for the market to absorb falling demand.”

The Fed committee hopes its more aggressive approach will help lessen inflation. “Clearly, today’s 75-basis-point increase is an unusually large one, and I do not expect moves of this size to be common,” Fed Chairman Jerome Powell said at a news conference Wednesday. Still, Powell said he expected the Fed’s July meeting to see another increase of 50 or 75 basis points, but he said decisions will be made “meeting by meeting.”

Nevertheless, the committee still appeared optimistic about the economy. “Overall economic activity appears to have picked up after edging down in the first quarter,” the committee said in a statement. “Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply-and-demand imbalances related to the pandemic, higher energy prices and broader price pressures.” The committee is forecasting inflation to move significantly lower in 2023.

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