Mortgage rates started off 2022 with a bang, as the average rate moved higher than at any point last year.
The 30-year fixed-rate mortgage averaged 3.22% in the week ending on Jan. 6, up from an average 3.11% last week. A year ago the 30-year rate was 2.65%, the lowest on record.
"Mortgage rates increased during the first week of 2022 to the highest level since May 2020 and are more than half a percent higher than January 2021," said Sam Khater, Freddie Mac's chief economist.
Rates have been expected to rise as the economy improves and inflation looms.
"With higher inflation, promising economic growth and a tight labor market, we expect rates will continue to rise," Khater said.
Forecasts have rates climbing throughout this year. Lawrence Yun, chief economist at the National Association of Realtors expects the 30-year fixed mortgage rate to average 3.7% by the end of 2022, while Jacob Channel, LendingTree's senior economic analyst, predicts rates of nearly 4%.
"This could make home affordability an even greater challenge — especially for lower income buyers," Channel said. "Fortunately, rising rates aren't all bad news, as higher rates will likely mean fewer new homebuyers and an overall less hyper-competitive housing market."
Applications for purchase mortgages and refinances were down at the end of December, even after accounting for the typical slowdown around the holidays, according to the Mortgage Bankers Association.
"Refinance demand continues to dwindle, as many borrowers refinanced in 2020, and in early 2021, when mortgage rates were around 40 basis points lower," said Joel Kan, MBA's associate vice president of economic and industry forecasting.
The number of applications for mortgages to purchase a home also finished the year on a slower note, with the final week of the year coming in at the weakest since October, Kan said. "Even though average loan sizes were lower, home price appreciation remains at very high levels."
Housing inventory is still near record lows at the start of 2022, which is keeping prices high.
"For buyers still reeling from last year's overheated market and sky-high prices, fast-paced inflation is squeezing their budgets, and offsetting low mortgage rates," said George Ratiu, Realtor.com's manager of economic research.
A driving force behind the higher rates is the recovering economy.
The strong advance in mortgage rates followed a jump in the 10-year Treasury to the highest level since March 2021, said Ratiu. The movement came after the Federal Reserve released its December meeting minutes Wednesday, which indicated that it's planning to wrap up its stimulus program faster than originally announced, and raise rates throughout the year.
Until now, mortgage bond investors, whose movements impact interest rates, have taken a "wait-and-see" approach to the impact of the omicron variant on the economy, Ratiu said.
"The variant appears to be milder, and economic data is showing strong resilience," said Ratiu. "I expect the upward momentum in Treasury rates to continue to drive mortgage rates higher."