U.S. mortgage rates moved firmly higher last week as borrowing costs renewed their march toward the 7% mark amid the Federal Reserve's ongoing effort to cool domestic inflation rates.
The Mortgage Bankers Association said 30-year fixed rates for conforming loan balances of less than $647,200 rose 22 basis points (0.22 percentage point) to 6.91% for the week ended May 26. The move took that headline rate back near the highest level since May 2002. Recent mortgage rates peaked at 7.08% in November of last year.
The MBA's seasonally adjusted Purchase Index, which tracks mortgage applications for purchases of single-family homes, fell 2.5% as buyers backed away from new transactions amid the increase in borrowing costs. New applications were down 3.7% for the week, hitting the lowest level in three months. The MBA also said its refinancing index fell 6.9%.
Expectations of Another Fed Rate Increase
The rate increase reflects changes in market forecasts toward another Federal Reserve rate hike. That increases banks' borrowing costs, which are then passed on to new and current mortgage customers.
Current projections suggest the Fed will lift its base lending rate, which currently sits between 5% and 5.25%, by another quarter-point next week, taking it to the highest levels since 2007.
“Inflation is still running too high, and recent economic data is beginning to convince investors that the Federal Reserve will not be cutting rates anytime soon, said the MBA's chief economist, Michael Fratantoni.
“Application volumes for both purchase and refinance loans decreased last week due to these higher rates,” he added. "While refinance demand is almost entirely driven by the level of rates, purchase volume continues to be constrained by the lack of homes on the market."
Federal Reserve Chairman Jerome Powell has said that the central bank's inflation fight will need to involve both higher rates of unemployment and a weakened housing market. Both those factors feed into consumer-price pressures in the form of higher wages and increased costs.
Housing-market activity has shown some signs of improvement lately, with permits for new construction rising to a seven-month high in April, according to data from the Commerce Department. In addition, homebuilder sentiment improved to levels last seen in July 2022, according to the National Association of Homebuilders.
Completions were at a 15-month low, however, and tighter lending standards, as well as fading demand linked to higher interest rates, could prevent the much-needed boost in new-home inventory.
Higher Rates Reducing Housing Demand
Higher mortgage rates have already pinched demand, with existing-home sales falling for a second month in April even as prices rose in nearly half the country's selling regions.
Existing-home sales were down 3.4% in April, suggesting an adjusted annual rate of 4.28 million units, with the average median price down 1.7% from a year earlier to $388,800, according to the National Association of Realtors.
Pending home sales -- a forward-looking indicator of demand based on contract signings -- were down 20.3% from last year's levels in April, amid what the group called "affordability challenges" that "continue to hold back contract signings."
The Mortgage Bankers' Association, which also measures home-buyer affordability, said the median payment for purchase applications over the month of April was up 0.9% to $2,112, amid "elevated interest rates and low housing supply."
Redfin, the real estate group, also said Wednesday that first-quarter home purchases from real estate investors fell the most on record, slumping 48.6% amid elevated interest rates and declining home values.
“While investors have pumped the brakes on home purchases, they’re still scooping up a bigger share of homes than they were before the pandemic, which can create challenges for individual buyers at a time when there are so few homes for sale,” Sheharyar Bokhari, Redfin senior economist, said.
“Investors have gravitated toward more affordable properties due to still-high housing costs and rising mortgage rates, which has left first-time home buyers with fewer starter homes to choose from.”
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