Mortgage rates keep climbing. Will buyers give up?
Rates are likely to stay higher for longer, but as inventory builds, pent-up demand and more home choices could entice buyers — if they can afford it.
Key points:
- The 30-year fixed-rate mortgage rose for the fifth straight week to 7.22%, the highest level since November.
- With the Fed continuing to delay rate cuts, mortgage rates are expected to remain around this level for at least the remainder of the spring homebuying season.
- However, there are mixed signals on what this means for home sales. Mortgage applications continue to slow, but new contracts and home tours have increased.
It's becoming clear that mortgage interest rates will remain elevated in the final weeks of the spring homebuying season. What's less clear is whether potential buyers will wait for rates to come down, or decide to take the plunge.
According to Freddie Mac, the 30-year fixed-rate mortgage rose for the fifth consecutive week, averaging 7.22% — a level last seen in late November. A year ago, mortgage rates averaged 6.39%.
The 15-year fixed-rate mortgage also rose, averaging 6.47% this week. That's up from 5.76% a year ago.
With inflation remaining stubbornly high and the labor market strong, the Federal Reserve continues to keep interest rates at elevated levels. During a press conference on May 1, Reserve Chairman Jerome Powell said "my confidence in that is lower than it was" that inflation is heading toward the 2% goal, and the Fed is waiting to cut rates until there are clearer signs that the economy is slowing.
After its March meeting, the Fed indicated it was considering three rate cuts in 2024, but as inflation persists, multiple cuts could be less likely.
Are people buying homes?
Elevated rates appear to be keeping buyers away, even though they have more homes to choose from.
The latest numbers from the Mortgage Bankers Association continue to show a decline in applications, which fell 2.3% overall compared to a week prior. Purchase applications were down 14% compared to a year ago. Adjustable rate mortgages are increasing in popularity, a sign that more buyers believe rates will eventually decrease.
As rates and home prices remain elevated, inventory has been slowly building, giving homebuyers more choices than they've seen in recent years. Realtor.com estimates inventory climbed 30.4% annually in April. Even more promising was the 41% increase in homes priced between $200,000 and $350,000 compared to the previous year, said Hannah Jones, senior economic research analyst for the company.
"Though inventory levels are moving in the right direction, the number of homes on the market is still nearly 40% lower than pre-pandemic," Jones noted.
More new contracts, touring
Altos Research has also noticed a rise in inventory — and more new contracts than in any week in 2023, said Founder Mike Simonsen. Having more inventory than at any time last year could cause home prices to soften later this year. Or, pent-up buyer demand could lead to more sales, despite the higher mortgage rates.
"You'd think that the sales rate would be slowing, but we don't see signs of purchases slowing further, yet," Simonson said, adding that he does expect a slowdown if rates remain elevated.
Redfin's homebuyer demand index is down 9% year-over-year, according to its weekly market report — but touring activity is up. That's giving homebuyers who can afford today's mortgage rates an opportunity to jump into the market, said Redfin Economic Research Lead Chen Zhao.
The next update on inflation comes May 15. That reading could provide more insight into how much this "higher for longer" period will last.