Mortgage rates jump again, causing headaches for homebuyers

Potential buyers walk past an ‘Open House’ sign posted in the front yard of a property for sale in Columbus, Ohio.

Ty Wright | Bloomberg | Getty Images

The average rate for the popular 30-year fixed-rate mortgage hit 3.7% on Tuesday morning, according to Mortgage News Daily. This is the highest since early April 2020 and now 83 basis points higher than the same period a year ago.

Rates are reacting to soaring bond yields, as financial markets react to the Federal Reserve’s faster and more aggressive tightening of monetary policy. Mortgage rates more or less track the yield of 10-year US Treasuries, but they are also affected by demand for mortgage-backed bonds. The Fed had bought these bonds aggressively during the pandemic to keep rates low, but is now pulling out of the MBS market faster than expected.

Mortgage rates “would be higher, but lenders are compressing their margins to compete in a rising rate environment. Some will be at 3.625%, but many are already at 3.75%,” said Matthew Graham, director of the operating Mortgage News Daily.

Lenders are losing large amounts of refinance activity, which had exploded just a year ago when rates were much lower. Home loan refinance applications are down 50% from a year ago, according to the Mortgage Bankers Association’s latest weekly survey.

“While rapidly rising rates are motivating some of the holdouts, particularly those seeking cash refinances, rates are now becoming a bigger deterrent,” Graham said. “In other words, refi’s share of the origination market is expected to take a substantial hit in upcoming updates.”

Mortgage rates hit more than a dozen record lows in 2020, driving an even bigger spike in already strong demand from homebuyers. With the added buying power offered by low rates, buyers have driven up prices on the low supply of homes for sale, and those prices are still up double digits from a year ago.

Both new and existing home prices are at record highs, and there is still not enough supply to cool the market.

Rising rates are not what potential buyers want to see on the eve of a usually busy spring housing market. Buyers of new builds are also concerned as lead times from contract to closing are now long due to supply chain and labor issues. These buyers cannot lock in rates until they have a firm closing date.

Buyers of an existing home at the median price (about $350,000) are now looking at monthly payments about $125 more than they would have been just a few months ago. This may exclude some from the market, especially low-end first-time buyers.

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