Mortgage rates dip again, but it's still tough to afford a home

(CNN) Mortgage rates fell slightly this week, marking the third consecutive week of declines. But with rates hovering above 5% and home prices well above where they were this time last year, prospective buyers are finding it increasingly difficult to afford a home.

The 30-year, fixed-rate mortgage averaged 5.09% in the week ending June 2, down from 5.10% the week before, according to Freddie Mac. It is still well above the 2.99% average from this time last year.

"Mortgage rates continued to inch downward this week but are still significantly higher than last year, affecting affordability and purchase demand," said Sam Khater, Freddie Mac's chief economist. "Heading into the summer, the potential homebuyer pool has shrunk, supply is on the rise and the housing market is normalizing. This is welcome news following unprecedented market tightness over the last couple years."

Rising prices had already been pushing many prospective buyers to the sidelines. But as rates continued to rise this year, even more home shoppers have put their search on hold.

"The relentless rise in home prices and recent increase in interest rates slowed down buyer activity in April as shown by a month-over-month drop in existing home sales, new home sales, and pending home sales, as some buyers opted out of the market altogether," said Hannah Jones, economic data analyst at Realtor.com. "Still, home buyers continued to contend with record-high home prices in May."

At the end of May 2021, a buyer who put 20% down on a $375,500 home -- a price just below the median price for an existing home -- and financed the rest with a 30-year, fixed-rate mortgage at an average interest rate of 2.99% had a monthly mortgage payment of principal and interest of $1,265, according to numbers from Freddie Mac.

Today, a homeowner buying the same price house with an average rate of 5.09% would pay $1,629 a month in principal and interest. That is $364 more each month and $131,147 more in cumulative interest payments over the life of the loan, according to numbers from Freddie Mac.

But, said Jones, there may be good news ahead with more homes coming onto the market.

"While inventory is still low by historical standards, it is starting to tilt in a more buyer-friendly direction," she said. "This is likely to lead to slower price growth in the not-so-distant future as sellers compete for buyers, finally creating a more balanced market."

Will mortgage rates keep climbing?

Still, many buyers can't afford to buy a home that fits their needs with mortgage rates so high.

"Those who are currently home shopping will tell you that we're not there yet, as still-high interest rates and home prices are creating challenges in finding their ideal home," said Jones.

Mortgage rates tend to track 10-Year US Treasury bonds. However, rates remained mostly flat last week even with an increase in 10-year Treasury yields.

But rates are also indirectly impacted by the Federal Reserve's actions.

The Fed has been seeking to tame inflation by raising interest rates over the past couple of months. And the central bank has signaled there are more rate hikes to come.

Earlier this week, President Joe Biden met with Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen and voiced his support of the Fed's actions to rein in inflation and pledged to refrain from influencing interest rate decisions.