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Housing Headache: Mortgage Rate Hits 12-Year High

The 30-year fixed-rate mortgage averaged 5.27% in the week ended May 5, according to Freddie Mac.
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Buying a home continues to get more expensive.

The 30-year fixed-rate mortgage averaged 5.27% in the week ended May 5, a 12-year high, according to Freddie Mac. The rate increased from 5.1% a week earlier and 2.96% a year earlier.

“Mortgages now compared to just a few months ago are costing more money for home buyers,” Lawrence Yun, chief economist of the National Association of Realtors, said in a recent speech.

In addition to the higher mortgage rates, home prices soared 19.8% in the 12 months through February, according to the Case-Shiller home-price index. The median existing-home price hit a record $375,300 in March, according to NAR.

“For a median-priced home, the price difference is $300 to $400 more per month, which is a hefty toll for a working family,” Yun said.

55% More Expensive

NAR estimates that purchasing a home is now 55% more expensive than it was a year earlier. Although wages are rising, those increases are being “wiped away” by inflation, Yun said. Average hourly wages climbed 5.5% in the 12 months through April.

The outlook moving forward isn’t pretty, Sam Khater, Freddie Mac's chief economist, said in a statement. "While housing affordability and inflationary pressures pose challenges for potential buyers, house-price growth will continue,” he said. O

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On the bright side, that ascent “is expected to decelerate in the coming months," he said.

Yun expects higher mortgage rates to slow the housing market, citing a five-month decline in pending-home sales and a drop in new single-family-home sales.

Role of the Fed

The Federal Reserve is trying to cool the housing market with its interest-rate increases.

"The housing market is definitely out of whack," said Fed Gov. Christopher Waller. "We'll see how the interest rates start cooling things off going forward."

The Fed has raised rates 0.75 percentage point so far and has indicated plenty more is coming. if home prices keep climbing and housing demand remains strong, the central bank may really have to put on the brakes, according to Bloomberg.

“They [Fed officials] are not going to get the decline in economic activity through housing that they typically get, at least not as quickly as they typically get it,” Mark Zandi, chief economist for Moody’s Analytics, told Bloomberg. “They may have to press on the brakes even harder.”

In any case, given that more rate hikes are a near certainty, some home hunters may rush to complete purchases before rates ascend further, industry pros say.

"The next couple of months things are going to heat up until we get to an inflection point," probably this summer, Zillow Economist Nicole Bachaud told Reuters.