Mortgage News Daily reported Tuesday that the average 30-year fixed-rate mortgage rate was at 3.7%. This is the highest rate since April 2020, and 83 basis points more than one year ago.

The Federal Reserve’s tightening of monetary policy is causing rates to react to rising yields on bonds. Although mortgage rates follow closely the yield of the U.S. Treasury’s 10-year note, they also are affected by the demand for mortgage-backed securities. To keep interest rates low, the Fed bought those bonds in large quantities during the pandemic. However, it has been pulling back from the MBS markets faster than anticipated.

Although mortgage rates would be higher than they are now, lenders have been reducing their margins in order to remain competitive in an environment where interest rates are rising.  Matthew Graham, CEO of Mortgage News Daily, stated that some will reach 3.625% while others are at 3.75%.

The vast majority of the refinance business that lenders are losing is from last year, when interest rates were higher. According to the latest weekly survey by the Mortgage Bankers Association, 50% less applications were made to refinance home loans than a year earlier.

“While the rapid rate spike is motivating a certain portion of fence-sitters–especially those looking for cash-out refinances, rates are now becoming a bigger deterrent,” said Graham. Graham stated that “the refi portion of the origination markets should take a major hit in future updates.” 

The record-breaking mortgage rate of 12.5% was set in 2020. It caused already high homebuyer demand and a further increase in the rates. Low rates gave buyers more purchasing power, which drove up homebuyer demand. Prices are up by double digits compared to a year ago due to the limited supply.

New and existing property prices have reached record levels, but there’s not enough inventory to cool down the market.

On the edge of the bustling spring housing market, rising rates may not be what buyers are looking for. New construction buyers are concerned as the time from contract to close is often extended due to labor and supply chain issues. These buyers cannot lock in rates until they are certain about a closing date.

The median home, which is $350,000 in price, now has monthly payments that are $125 higher than it was a month ago. It may make some people out of market, particularly first-time home buyers who are at the lower end.