Mortgage rates approach 4% much faster than expected

A week ago, economists projected mortgage rates would reach 4% toward the year-end. Now, the rate on the 30-year fixed home loan is just a whisper from that threshold, hitting 3.92% this week.

That’s up from 3.69% from last week, according to Freddie Mac, and the highest rate recorded since May 2019. Since the beginning of the year, the rate has jumped more than three-quarters of a point on increased expectations that the Federal Reserve will make moves soon to beat back runaway inflation.

The recent dramatic rise in rates is making it tougher for buyers to get in an already difficult housing market and slamming shut refinance opportunities for homeowners.

“As rates and house prices rise, affordability has become a substantial hurdle for potential homebuyers,” said Sam Khater, Freddie Mac’s chief economist, “especially as inflation threatens to place a strain on consumer budgets.”

Homebuyer confidence declines

Entry-level homebuyers and those living in high-cost areas continue to feel the pressure of climbing mortgage rates, as tightening affordability and rock-bottom inventory levels price many out.

Mortgage applications for a home purchase decreased by 5.4% on a seasonally adjusted basis from the previous week, according to the Mortgage Bankers Association (MBA), with government-backed purchase applications accounting for the largest decline.

This could indicate moderate-income buyers are getting squeezed out of the market, according to Danielle Hale, chief economist at Realtor.com.

“First-time homebuyers can be pretty interest rate sensitive,” Hale told Yahoo Money. “Even if they aren’t buying the most expensive homes, they are usually buying homes with lower income and often have a lower down payment available.”

“For people purchasing in high-cost areas where home prices are expensive, a small change in mortgage rates can also have a sizable impact on the extra dollars that you will need to spend,” Hale added.

The MBA survey released Wednesday put mortgage rates just above 4% for the first time in two years. A 4% rate combined with the record-high mortgage loan size of $453,000 pushes the monthly payment up more than 25% from a year ago, according to Len Kiefer, deputy chief economist at Freddie Mac.

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“If you’re thinking about waiting until next year and that maybe rates are higher but you’ll get a deal on prices — well that’s risky,” said Kiefer, who thinks prices will likely increase. “It may be more advantageous to purchase this year relative to waiting until 2023 at this time.”

Adding to first-time buyers’ troubles are rent prices, which rose more than 14% in December, according to Redfin. This leaves potential buyers with less cash available for a down payment.

“Homeownership is not for everybody right now,” chief economist and senior vice president of research for the National Association of Realtors, Lawrence Yun, told Yahoo Money. “Just trying to save up for a down payment is a challenge for many young people.”

Refinance numbers continue to tumble

Rates have hit homeowners, too, who have sharply pulled back from refinancing. The volume of refinance applications dropped 9% last week from the previous one and is down 54% from a year ago.

“If you haven’t locked in a rate already… and you’re one of the few borrowers that has a rate over 4.5% percent, refinancing now may be advantageous,” said Kiefer. “But I think that the number of borrowers that are going to look at mortgage rates today as favorable is going to be pretty small.”

The population of high-quality refinance candidates who could shave three-quarters of a point from their mortgage plunged to 3.8 million this week, according to new figures mortgage analytics firm Black Knight gave Yahoo Money, down from 5.1 million a week ago.

That’s a sharp contrast to the 11 million eligible refi borrowers during the first weeks of 2022.

Where will rates go?

Inflation was largely to blame for the sharp increase in rates last week after the government reported consumer prices jumped 7.5% in January – the highest level since 1982.

So far, the yield on the 10-year Treasury, which fixed mortgage rates tend to track, have moved higher in anticipation of the Fed’s plans to slow its purchases of bonds and mortgage-backed securities and increase its benchmark short-term rate to rein in inflation.

But developments in Ukraine could also affect rates — potentially tamping down increases.

“This is one of the situations where it really depends on how things move,” Kiefer said. “A major conflict or tremendous uncertainty could have a very large impact on mortgage rates.”

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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