Mortgage rates took a breather last week, dropping slightly after seven consecutive weeks of increases.

The 30-year fixed-rate mortgage averaged 5.10% in the week ending April 28, a tick down from 5.11% the week before, according to Freddie Mac. But it’s still significantly higher than the rate this time last year, when the 30-year fixed rate averaged 2.98%.

“The combination of swift home price growth and the fastest mortgage rate increase in over forty years is finally affecting purchase demand,” said Sam Khater, Freddie Mac’s chief economist.

Khater said prospective buyers are dealing with the increased cost of buying a home by moving their home search away from coastal cities and looking to more affordable suburbs.

Some buyers, he said, are switching to adjustable-rate mortgages, in which the interest rate resets after a certain amount of time. Last week the five-year adjustable-rate mortgage tracked by Freddie Mac averaged 3.78%.

“We expect the decline in demand to soften home price growth to a more sustainable pace later this year,” said Khater.

The pace of rate growth stalled last week following a slight retreat in the 10-year Treasury, said George Ratiu, Realtor.com’s manager of economic research. US Treasury bonds – particularly the 10-year Treasury – are a bellwether for fixed-rate mortgages. When 10-year Treasury yields fall, mortgage rates tend to move that way too.

“The Treasury yield backed off as investors worried about China’s worsening Covid outbreak and large-scale lockdowns,” he said. In addition, he said, commodity prices are experiencing another shock from supply chain disruptions due to the war in Ukraine.

“Inflation is likely to run at a fast pace for longer than expected, keeping pressure on mortgage rates for the medium term,” said Ratiu.

Buyers backing off

There are signs that the higher interest rates are beginning to take a toll on the housing market.

Applications for mortgages were down 8.3% last week from the week before, according to the Mortgage Bankers Association. Mortgage applications to buy a home were 17% lower than a year ago and applications to refinance a loan were down 71% from this time last year.

In addition, the number of signed contracts to buy a home fell in March, marking five months of declines in a row, according to the National Association of Realtors, as low inventory and higher costs of getting into a home pushed buyers to the sidelines.

But with fewer buyers in the market, home prices are expected to cool in many areas.

“Markets reached peak prices early this spring, with the next few months expected to see a moderation in the pace of appreciation followed by a flattening in the fall,” said Ratiu.

“The good news is that for buyers frustrated by the past year’s frenzied market, the shift toward a more normal landscape holds the promise of more homes to choose from, a slower pace of sales, and better prices.”

Home affordability declining

Cooling prices don’t necessarily mean the cost of homeownership will drop, however.

Homebuyer affordability declined in March, with the national median monthly mortgage payment rising 5% to $1,736 from $1,653 in February, according to the MBA.

This has given the usually active spring homebuying season a mixed start, said Edward Seiler, MBA’s associate vice president of housing economics and executive director of the Research Institute for Housing America.

“The healthy labor market and robust wage gains fueled demand throughout the country in March, but rapid home-price growth and the surge in mortgage rates last month slowed purchase application activity,” he said.

A typical borrower’s principal and interest payment was $387 more in March than a year earlier, said Seiler.

“Swift price-appreciation, sky-high inflation, low inventory, and mortgage rates now two percentage points higher than last year are all headwinds for the housing market in the coming months – especially for first-time buyers,” said Seiler.