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Mortgage Rates Hit 12-Year High; Homebuyers Take a Hit

The 30-year fixed-rate mortgage averaged 5.30% in the week ended May 12.
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The woes continue to mount for the housing market, especially prospective homebuyers.

The latest bad news: the 30-year fixed-rate mortgage averaged 5.30% in the week ended May 12, the highest since July 2009, according to housing agency Freddie Mac. That compares to 5.27% a week earlier and 2.94% a year earlier.

This means a year ago, homebuyers were paying $294 in annual interest on every $10,000 of their mortgage loan, compared to $530 now. That’s an 80% increase.

“The run up of mortgage rates since beginning of the year has the same impact on affordability as an increase in home prices of more than 20%,” Greg McBride, chief financial analyst at, told Bloomberg.

The mortgage rate increase, of course, stems from rampant inflation, which is pushing bond yields higher and forcing the Federal Reserve to raise interest rates.

“In the months ahead, we expect monetary policy and inflation to discourage many consumers, weakening purchase demand and decelerating home price growth,” Sam Khater, Freddie Mac’s chief economist,” said in a statement.

Mortgage Applications Rose

One piece of good news for housing did emerge recently. Mortgage applications increased 2% in the week ended May 6 from a week earlier, according to the Mortgage Bankers Association (MBA). Purchases climbed 5% from a week earlier but were down 8% from a year ago.

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“Despite a slow start to this year’s spring home buying season, prospective buyers are showing some resiliency to higher rates,” MBA economist Joel Kan said in a statement.

“Purchase activity has now increased for two straight weeks. More borrowers continue to utilize ARMs [adjustable rate mortgages] to combat higher rates.” ARMs’ share of total mortgage applications rose to 10.8%, the highest since 2008.

You might think that home buyers would shy away from ARMs as rates rise.

But, “ARM loans typically have lower [starting] rates than fixed rate mortgages, and as this spread has widened, ARM loans have become more attractive to borrowers already facing home purchase loan amounts close to record highs,” Kan said.

Rates on ARMs are sometimes fixed for the first five, seven or 10 years of the mortgage. The danger, of course, is that ARM rates can soar later in the mortgage’s term.

Bank of America’s View

Meanwhile, Bank of America economists expect that higher mortgage rates and lower affordability will lead to a decline in existing home sales this year. They see a 5 million-unit annual sales pace for existing homes by December, down 18% from 6.1 million in 2021.

But they note that supply of existing homes for sale equals just two months of the current sales pace and that demographics are driving demand.

As a result, the economists predict a 15% increase in home prices this year. The Case-Shiller Home Price index soared 19.8% in the 12 months through February.