Mortgage rates soar to highest level in over a decade — even wealthy home buyers are feeling the pain

It’s the first time since February 2011 that the benchmark mortgage product has reached the 5% mark. Mortgage rates now stand nearly 2 percentage points higher than they were during the popular spring home-buying season in 2021. This time last year the average rate on the 30-year fixed-rate mortgage was 3.04%.

The 15-year fixed-rate mortgage rose above the 4% threshold for the first time since 2018, averaging 4.17%. The 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 3.69%, rising 13 basis points from the previous week.

“As Americans contend with historically high inflation, the combination of rising mortgage rates, elevated home prices and tight inventory are making the pursuit of homeownership the most expensive in a generation,” Sam Khater, chief economist at Freddie Mac, said in the report.

Earlier this week, the 10-year Treasury approached 2.8% but then subsided. Mortgage rates roughly track the direction of long-term bond yields, including the 10-year Treasury’s yield TMUBMUSD10Y, 2.829%.

Bond investors are taking a close look at inflation gauges and the Federal Reserve’s stance. Some analysts viewed the most recent consumer and producer price indexes as signaling a peak to inflation, but others argue it may be premature to declare a top.

Meanwhile, mortgage rates are moving higher — and that’s putting considerable pressure on buyers.

“While this may still turn out to be a blip, it is increasingly looking as if a combination of substantially higher mortgage rates and a steep run-up in house prices is having a cooling effect on demand,” Joshua Shapiro, chief U.S. economist at MFR Inc., said in a research note, citing mortgage application data.

Indeed, data from the Mortgage Bankers Association in recent weeks has shown a downturn in applications for mortgages backed by the Federal Housing Administration, which economists see as an indication that first-time home buyers are being pushed out of the market.  FHA loans are more popular with first-time buyers because they have less onerous eligibility requirements in terms of down payments and credit scores than loans backed by Fannie Mae FNMA, +2.18% and Freddie Mac, though they typically come with higher mortgage rates.

But there’s evidence that even the wealthiest home buyers are also feeling the pain of higher rates and rising prices. A recent report from real-estate brokerage Redfin RDFN, -4.21% found that mortgage-rate locks for loans used to purchase second homes had dropped to the lowest level since May 2020.

While demand for these vacation properties was still 13% above pre-pandemic levels, Redfin researchers indicated that the historically fast run-up in mortgage rates had priced out even buyers with the most cash to spare.

“The pandemic-driven surge in sales of vacation homes is coming to an end as mortgage rates rise at their fastest pace in history, causing some second-home buyers to back off,” Redfin deputy chief economist Taylor Marr said in the report.

Marr added that new loan fees that affect mortgages for second homes likely have also had an impact on buyer demand, while stock-market volatility may have chipped away at some of these buyers’ down payments. Nevertheless, it’s a worrying sign for the broader housing market.

“When rates and prices shoot up so much that a vacation home starts to look more like a burden than a good investment and a fun place to bring your family on the weekends, a lot of prospective buyers have second thoughts,” Marr said.