(CNN)Mortgage rates climbed past 4% for the first time since May 2019. The 30-year fixed-rate mortgage averaged 4.16% in the week ending March 17, up from 3.85% the week before, according to Freddie Mac.
Rates climbed as the Federal Reserve moved to curb soaring inflation. On Wednesday, the central bank announced it would raise interest rates for the first time since 2018. The action marks the end of the Fed’s pandemic-era easy-money policy. The federal funds rate now stands at 0.25-0.5%.
Mortgage rates are not directly tied to the federal funds rate. Rather, they track the yield on 10-year Treasury bonds, which are influenced by factors including investors’ reactions to the Fed’s moves and inflation.
“The Federal Reserve raising short-term rates and signaling further increases means mortgage rates should continue to rise over the course of the year,” said Sam Khater, Freddie Mac’s chief economist.
Rising inflation and the uncertainty in Ukraine are also impacting rates.
“Inflation is unlikely to slow down any time soon,” said George Ratiu, Realtor.com’s manager of economic research. “Investors are reacting to the deepening war in Ukraine and expecting renewed supply chain disruptions to add additional pressures on consumer prices.”
All these factors will continue to push mortgage rates higher in the months ahead, he said. That means one of the main drivers of home sales over the past two years — super low mortgage rates — is drying up.
“Record-low mortgage rates helped many first-time buyers stretch their budgets in 2020 and 2021,” Ratiu said. “Low rates also enabled homeowners to lower their monthly mortgage payments through refinancing. However, the days of sub-3% interest rates are firmly behind us, and we have yet to solve the market fundamentals of supply and demand.”
Inventory is still at record lows and home prices continue to climb. Skyrocketing rents are putting added pressure on the market, as buying a home — even with high prices and rising interest rates — makes more financial sense than renting in some markets.
But the cost of homeownership is going up. Not only are home prices soaring but, at today’s rates, the monthly mortgage for a buyer of a median-priced home will be more than $340 higher than it was a year ago, adding over $4,000 to their yearly burden, according to Ratiu.
But he said higher rates may also reduce competition in the housing market.
“As rising mortgage rates and inflation squeeze the pool of buyers, we expect to see home prices moderate,” said Ratiu.