Mortgage Rates Climb: Will Homebuyers Give Up?

With rates expected to stay high, buyers may find hope in growing inventory and more options, but affordability remains a challenge.

Mortgage interest rates are expected to remain elevated as we head into the final weeks of the spring homebuying season. According to Freddie Mac, the 30-year fixed-rate mortgage has risen for the fifth consecutive week, reaching an average of 7.22% — a level last seen in late November. This is a significant increase from a year ago when rates averaged 6.39%. The 15-year fixed-rate mortgage has also seen a rise, averaging 6.47% this week compared to 5.76% a year ago.

The Federal Reserve has been keeping interest rates at elevated levels due to high inflation and a strong labor market. While the Fed initially indicated three rate cuts in 2024, the persistence of inflation may make multiple cuts less likely.

Despite having more homes to choose from, potential buyers seem to be holding back due to the elevated rates. Mortgage applications have seen a decline, with purchase applications down 14% compared to a year ago. However, adjustable rate mortgages are becoming more popular as buyers anticipate a decrease in rates.

The increase in inventory has given homebuyers more options, with inventory climbing 30.4% annually in April. Homes priced between $200,000 and $350,000 have seen a 41% increase compared to the previous year. Altos Research has observed a rise in inventory and more new contracts than in any week in 2023, which could potentially lead to softer home prices later in the year.

While Redfin's homebuyer demand index is down 9% year-over-year, touring activity is on the rise. This presents an opportunity for buyers who can afford current mortgage rates to enter the market. The next update on inflation on May 15 will provide more insight into the duration of this "higher for longer" period.

The housing market continues to be influenced by elevated mortgage rates and high inflation. Potential buyers are faced with a decision to wait for rates to decrease or take the plunge into the market. The coming weeks will reveal whether the current trends will persist or if there will be a shift in the market dynamics.