Mortgage rates ticked lower, but are still well above 5%

(CNN) Mortgage rates fell slightly last week, but purchasing a home still remains difficult for many prospective buyers.

The 30-year, fixed-rate mortgage averaged 5.25% in the week ending May 19, down from 5.30% the week before, according to Freddie Mac. It is still well above the 3% average from this time last year.

"Economic uncertainty is causing mortgage rate volatility," said Sam Khater, Freddie Mac's chief economist. "As a result, purchase demand is waning, and homebuilder sentiment has dropped to the lowest level in nearly two years. Builders are also dealing with rising costs, meaning this posture is likely to continue."

As a result of rising rates, the cost of financing a home has gone up significantly for buyers since last year.

In May 2021, a buyer who financed 80% of their purchase price with a 30-year, fixed-rate mortgage for $300,000 had an average interest rate of 3%, making their monthly mortgage payment of principal and interest $1,267, according to numbers from Freddie Mac.

Today, a homeowner with the same loan and an average rate of 5.25% would pay $1,660 a month in principal and interest. That is $393 more each month or $4,716 more a year and $141,480 more over the life of the loan, according to numbers from Freddie Mac.

For many people, that additional $400 a month is the difference between deciding whether to buy a home and build equity or continuing to rent.

As long as the Federal Reserve is still working to stem inflation, mortgage rates are likely to remain at these levels or move higher. Federal Reserve Chairman Jerome Powell has said the central bank will continue to raise interest rates until the goal of healthy prices is met.

Mortgage rates tend to track 10-year US Treasury bonds, but they are also indirectly impacted by the Fed's actions on inflation. Yields on 10-year Treasury bonds were up and down this week, as investors looked for stability amidst a series of challenging economic data.

"The Federal Reserve's monetary tightening is having the intended effect of cooling housing demand, allowing the market to begin normalizing," said Hannah Jones, economic data analyst at Realtor.com

This can already be seen in the housing market, even though prices continue to climb. Redfin has reported that it's seeing fewer bidding wars and there are more available homes for sale compared to this time last year.

While both developments are welcome news for prospective buyers, rising housing costs have pushed many home seekers out of the market, said Jones.

She said those who are determined to find a new home will have the best success if they make a sizable down payment in order to reduce the amount they are borrowing or if they look further afield from their target area in order to find a more affordable home.

"However, for buyers who are unable to contend with higher prices and climbing mortgage rates, still-high inflation and rental prices offer little relief," said Jones.

Correction: An earlier version of this story misstated the direction in which rates headed. This week's average mortgage rate was down from 5.30% the previous week.