The cost to buy a home continues to climb as mortgage rates reach their highest levels since 2008, 5.8%. Home buyers in May paid about $740 more a month for a median-priced U.S. home than they did in May 2021.

The surge in mortgage rates is leading to an increase in price pressure for homebuyers. Mortgage rates have experienced their sharpest weekly increase since 1987 as the Fed struggles to get control over inflation.

Mortgage rates do not move automatically when the Fed raises rates but are tied closely to the 10-year U.S. Treasury yield, which tends to move in tandem with expectations for the Fed’s benchmark rate. The Fed is also winding down its purchases of mortgage-backed securities, which is also sending rates higher. 

“This has been brewing for a long time,” said Walt Schmidt, a mortgage strategist at FHN Financial. “It’s all because the MBS market is losing its single biggest buyer,” referring to mortgage-backed securities.

The recent increase in mortgage rates shows little sign of reversing course. The average mortgage rate rose nearly 2.7 percentage points in 2022, with the 10-year yield doubling.

U.S. Federal Reserve Chairman Jerome Powell says he expected an increase of either 0.5 or 0.75 percentage points at the Fed’s FOMC July meeting.

Mike Fratantoni, a chief economist at the Mortgage Bankers Association, is concerned about the effect Powell’s decisions will have on the market.

The Fed “is having a profoundly disruptive effect on real-estate markets,” said Fratantoni. “Demand for housing has dropped pretty sharply, and we’re beginning to see commercial real estate slow.”

 The RE/MAX National Housing Report for May 2022 showed the Median Sales Price of $430,000 grew 1.2% over April’s $425,000 and was 13.2% higher than the $380,000 recorded in May 2021.

Austin real-estate agent Amy Deane of Moreland Properties has seen a cooldown in the luxury real estate market. 

“Real-estate agents in places like New York, Los Angeles, and the Hamptons say the frenzied deal-making and record-setting prices that characterized the past few years has eased, thanks to a growing disconnect between what sellers want and what buyers will pay,” said Deane.

Inventory grew for the second consecutive month, making May the first month of 2022 to top 2021 inventory levels.

“A decline in home sales isn’t entirely unexpected given the higher mortgage rate environment, but the gains in inventory are welcome news for buyers who are now starting to see a few more listings come onto the market during their home search,” said Nick Bailey, President and CEO of RE/MAX. “Options in multi and single-family housing are there that weren’t available just a few short months ago. Affordability remains a concern, but homebuyers are regaining some control which has been long overdue.”

Some prospective buyers are discouraged by the high prices and expensive borrowing costs.

Ryan Serhant, CEO of real-estate brokerage Serhant, says the market is normalizing after a period of rapid appreciation, fueled by heightened demand. “You’re now starting to see buyers become a little hesitant to be caught at the top,” he said.