Homebuyers can’t catch a break. Mortgage rates advanced to their highest point since July 2009 this week.

The rate on the 30-year fixed mortgage increased to 5.3%, up from 5.27% last week, according to Freddie Mac. Mortgage rates have jumped over a half point in the last seven weeks and are 2 percentage points higher than the start of the year.

The dramatic hike in rates – following the Federal Reserve’s moves to increase interest rates to temper inflation – are adding to affordability challenges that buyers face along with rising prices and super low inventory. Further increases, which are expected, could douse the red-hot market with cold water.

Buyers still making moves

Rising rates haven’t been enough to put off eager homebuyers.

Mortgage applications for purchases increased for the second week in a row, according to Mortgage Bankers Association’s survey for the week ending May 6, rising 5% from one week earlier.

But unyielding demand, climbing borrowing costs, rising rent – and to top it off — record-high inflation levels continue to wear budgets down. If this trend continues, it could threaten to price out large swaths of buyers from the market.

“The challenges continue to mount for prospective homebuyers. Listing prices are at record highs and homes for sales are at historic lows,” said Realtor.com Senior Economic Analyst Joel Berner. “The rising costs of living and falling value of investments make saving for a down payment more difficult, and higher mortgage rates make borrowing for a home more expensive.”

A home is offered for sale on April 26, 2022 in Chicago, Illinois. According to the S&P CoreLogic Case-Shiller national home price index, home prices in the U.S. increased 19.8% in February year over year.  (Credit: Scott Olson, Getty Images)

According to Realtor.com, home prices surged to a national median of $425,000 in April, up 14.2% year over year and up 32.4% compared with April 2020. At the same time, the cost of financing 80% of a home listed for sale has increased by nearly 50% in the last year.

With listing prices near all-time highs, a growing number of homebuyers have been shifting to adjustable-rate mortgages, or ARMs. The average rate on the five-year ARM was 3.98% this week, according to Freddie Mac, significantly lower than the 5.3% on the 30-year fixed home loan.


Homeowners cut out of refinancing

Homeowners, on the other hand, have been forced to sit out any plans on refinancing in the near future.

The refinance share of mortgage activity slid to 32.4% of total applications from 33.9% the week prior, according to the MBA. Activity is 70% below a year ago.

Only 832,000 high-quality candidates could shave at least three-quarters of a point off their mortgage by refinancing at rates of 5.27% last week, down from 1.34 million four weeks ago, according to figures mortgage technology and data provider Black Knight previously gave Yahoo Money.

“Most homeowners refinanced to lower rates in the past two years,” Kan said.

People wait to visit a house for sale in Garden City, Nassau County, New York, the United States. Eager homebuyers stage bidding wars amid rising rates. (Credit: Xinhua/Wang Ying, Getty Images)

Higher rates likely to come

A higher-than-expected inflation reading for April — despite a pullback in energy price — likely means the Federal Reserve will continue to raise short-term rates aggressively to beat back higher prices. Last week, the central bank increased the benchmark interest rate by a half point and several Fed officials this week said two more half-point increases are likely at the next policymaking meetings.

Those rate increases have pushed the yield on the 10-year Treasury — which fixed mortgages tend to track — much higher. With more Fed hikes on the way, mortgage rates likely will go higher.