After a slight dip, U.S. mortgage rates jumped up again Thursday ahead of the Federal Reserve’s meeting next week when it’s expected to announce another big, half-point hike to its main borrowing rate.

What’s happening: The 30-year fixed-rate mortgage averaged 5.23% as of Thursday, up from last week when it averaged 5.09%, Freddie Mac reported.

  • A year ago, the average rate was below 3% — 2.96% — after the Federal Reserve dropped rates amid COVID-19. Now, as the Federal Reserve hopes to tamp down 40-year-high levels of inflation, it’s dialing up the pressure by hiking borrowing rates.
  • Up until April, the last time the average rate topped 5% was over 10 years ago.
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What they’re saying: “After little movement the last few weeks, mortgage rates rose again on the back of increased economic activity and incoming inflation data,” Sam Khater, Freddie Mac’s chief economist, said in a prepared statement Thursday.

The impact, Khater predicted, will be tempered demand and a cooling of price growth to pre-pandemic levels.

  • “The housing market is incredibly rate-sensitive, so as mortgage rates increase suddenly, demand again is pulling back. The material decline in purchase activity, combined with the rising supply of homes for sale, will cause a deceleration in price growth to more normal levels, providing some relief for buyers still interested in purchasing a home.”
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Impact to the housing market: The rate hikes, compounded with consistently rising housing prices, continue to price would-be homebuyers out of the market.

And it’s starting to take a toll on demand.

  • Mortgage applications fell 6.5% from a week prior, the Mortgage Bankers Association reported Wednesday. On a seasonally unadjusted scale, the index dropped 17% compared to the previous week.

It’s the lowest level the Mortgage Bankers Association index has seen in more than two decades, according to Joel Kan, the association’s vice president of economic and industry forecasting.

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“Weakness in both purchase and refinance applications pushed the market index down to its lowest level in 22 years,” Kan said. ”The 30-year fixed rate increased to 5.4% after three consecutive declines. While rates were still lower than they were four weeks ago, they remained high enough to still suppress refinance activity. Only government refinances saw a slight increase last week.”

Meanwhile, low inventory is feeding competition and sky-high prices are pinching buyers.

  • “The purchase market has suffered from persistently low housing inventory and the jump in mortgage rates over the past two months,” Kan said. “These worsening affordability challenges have been particularly hard on prospective first-time buyers.”

However, as high mortgage rates begin to cool the market, inventory is starting to see an uptick. And yet, since the U.S. housing market — especially high-growth cities in the West like Utah — have faced housing shortages, housing experts don’t predict widespread home price drops, only price deceleration to match pre-pandemic trajectories.

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Contributing: Associated Press

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