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Mortgage rates jump again, causing headaches for homebuyers

Potential home buyers walk past an ‘Open House’ sign displayed in the front yard of a property for sale in Columbus, Ohio.
Ty Wright | Bloomberg | Getty Images

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

Rates are reacting to surging bond yields, as financial markets react to swifter and more aggressive monetary policy tightening by the Federal Reserve. Mortgage rates loosely follow the yield on the 10-year U.S. Treasury, but they are also affected by demand for mortgage-backed bonds. The Fed had been buying those bonds aggressively during the pandemic in order to keep rates low, but it 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 up to 3.75%,” said Matthew Graham, COO of Mortgage News Daily.

Lenders are losing vast amounts of refinance business, which had been booming just a year ago when rates were much lower. Applications to refinance a home loan were down 50% from a year ago, according to the most recent weekly survey from the Mortgage Bankers Association.

“While the rapid rate spike is motivating a certain portion of fence-sitters–especially those looking for cash-out refinances, rates are now becoming a bigger deterrent,” said Graham. “In other words, the refi share of the origination market should be taking a substantial hit in forthcoming updates.” 

Mortgage rates set more than a dozen record lows in 2020, causing already strong homebuyer demand to surge even more. With the extra purchasing power afforded by low rates, buyers bid up prices on the low supply of homes for sale, and those prices are now 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 cusp of the usually busy spring housing market. Buyers of new construction are also concerned, as timelines from contract to closing are long now due to supply chain and labor issues. Those buyers can’t lock in rates until they have a firm closing date.

Buyers of the median-priced existing home (around $350,000) are now looking at monthly payments of about $125 more than they would have been just a few months ago. That may price some out of the market, especially first-time buyers on the lower end.

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