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Mortgage rates top 5% — and loan applications are taking a hit

Dallas Fed warns of housing bubble
MoneyWatch: Federal Reserve Bank of Dallas warns of housing bubble on the horizon 06:18

The average interest rate for a 30-year mortgage has now topped 5%, the highest point in more than a decade. The sudden rise has cooled interest in home loans, and some experts are predicting home sales could slow this year as some buyers get priced out of the market.

Interest rates rose to 5.08% on April 6, according to Mortgage News Daily, although the Mortgage Bankers Association listed average rates as slightly lower, at 4.90%. That's up from 4.67% last week, an increase of about two percentage points from a year earlier. 

The average home loan rate hasn't topped 5% since January 2010, according to Freddie Mac data

Each percentage point increase adds hundreds of dollars to monthly payments for buyers of median-priced homes of about $400,000. The higher rates are pricing millions of buyers out of the market, while also making it less attractive for current homeowners to refinance their properties. Home loan applications slipped more than 6% for the week ended April 1, according to the Mortgage Bankers Association.

Homebuyers have been hit with "a one-two punch" of rising home prices and rising mortgage rates this year, Jeff Tucker, senior economist for Zillow, told CBS MoneyWatch.

"What it means is any particular home you buy is going to be more expensive to pay for on a monthly basis," Tucker said. "For some folks that means looking at a smaller home in a different neighborhood, or a townhouse instead of a detached home."

The rising interest rates also mean homebuyers might want to change up their shopping strategy, said Redfin chief economist Daryl Fairweather.

"If you're looking for a home right now, you should be extremely in tune with your budget and careful of bidding too high over asking on newly listed homes," Fairweather told CBS MoneyWatch. "You should also take a look at homes that have been on the market for more than a week, or those that have recently had a price drop, as you may be able to avoid some of the more intense competition and make a reasonable offer."

Not all homebuyers are scared off by higher rates, said Matthew Pointon, a senior property economist at Capital Economics. Mortgage applications continue to pour in around some parts of the country "because some households are trying to buy now before rates rise further," Pointon said in a research note Wednesday.

Pandemic housing bubble?

During the pandemic, mortgage rates hit historic lows, partly as the Federal Reserve kept the federal funds rate close to zero and the federal government pumped trillions into the economy through its stimulus programs. Those ultra-low mortgage rates — which dipped as low as 2.65% in January 2021 — spurred millions of consumers to jump into the real estate market. 

With demand strong, sellers asked more for their properties, leading to double-digit annual price increases across the nation. In February, home prices jumped 20% compared with a year earlier, according to data released Wednesday from CoreLogic.

The rapid increase in home prices during the coronavirus pandemic has pushed the dream of homeownership beyond the means of many middle-class Americans, who are increasingly bidding against investors and higher-income buyers for a shrinking pool of homes. Among the cities experiencing some of the biggest home price increases in the U.S. are Atlanta, Charlotte, N.C., Phoenix, Miami, Florida and San Diego.

Those rapidly rising home prices have prompted concerns about the housing market, with the Federal Reserve of Dallas recently warning that the property market is showing "signs of a brewing U.S. housing bubble."

With inflation at a 40-year high, the Federal Reserve recently began the first in a series of interest rate hikes in 2022 — and mortgage rates are rising along with them. 

There are signs that rising mortgage rates are starting to impact the real estate market in other ways, with Redfin predicting that home price growth will slow. More sellers are reducing their asking prices after listing, the real-estate company said last week.

There's no guarantee that interest rates will jump again, but the Fed has signaled it is planning to raise its short-term borrowing rate a few more times this year. 

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