Originally Published: 04 AUG 22 10:02 ET

By Anna Bahney, CNN Business

(CNN) -- Mortgage rates dropped for the second week in a row, falling below 5% for the first time since mid-April.

The 30-year fixed-rate mortgage averaged 4.99% in the week ending August 4, down from 5.3% the week before, according to Freddie Mac. But that is still significantly higher than this time last year when it was 2.77%.

Rates rose sharply at the start of the year, hitting a high of 5.81% in mid-June. But since then, economic concerns have made them more volatile.

"Mortgage rates remained volatile due to the tug of war between inflationary pressures and a clear slowdown in economic growth," said Sam Khater, Freddie Mac's chief economist.

The up and down is expected to continue, he said.

"The high uncertainty surrounding inflation and other factors will likely cause rates to remain variable, especially as the Federal Reserve attempts to navigate the current economic environment."

The drop comes as surprisingly positive reports for some economic indicators counterbalanced the talk of looming recession, said George Ratiu, Realtor.com's manager of economic research.

"Without a clear direction, markets are confining mortgage rates to move within a tighter range, as the sharp upward push has moderated," he said.

In response to high inflation the Federal Reserve raised its benchmark interest rate by 75 basis points last week, the second hike of that size in as many months.

The Federal Reserve does not set the interest rates borrowers pay on mortgages directly. Instead, mortgage rates tend to track 10-year US Treasury bonds. But they are indirectly impacted by the Fed's efforts to tame inflation.

As for consumers, he said, they continue to spend, amassing a record $16.2 trillion in household debt according to data the Federal Reserve released this week.

"The big question for consumers is whether companies will over-react to the recession concerns and start trimming payrolls," Ratiu said. "A sharp pullback in hiring could have a direct impact on people's ability to keep spending, especially with today's high inflation."

Affordability still the biggest challenge

The higher costs to finance a home have already had an impact on buyers. Sales of both new construction and existing homes have fallen in recent months as buyers take a break from house hunting.

Buyers are finding homes even less affordable as inflation takes a larger chunk of their income and the rising cost of borrowing has reduced their purchasing power.

A year ago, a buyer who put 20% down on a $390,000 home and financed the rest with a 30-year, fixed-rate mortgage at an average interest rate of 2.77% had a monthly mortgage payment of $1,277, according to numbers from Freddie Mac.

Today, a homeowner buying the same priced house with an average rate of 4.99% would pay $1,673 a month in principal and interest. That's nearly $400 more each month.

With increased borrowing costs setting an affordability ceiling for many buyers, home sales are dropping, said Ratiu. At the same time, inventory is improving.

"This brought a welcome sign in this year's real estate markets -- price cuts," Ratiu said.

However, with buyers dropping out, some sellers are holding back too, feeling they have missed the market's peak, according to Realtor.com. Homeowners with equity may not be compelled to sell in this slower market with higher financing costs.

"As the number of new listings softens, it raises the concern that the nascent improvement in inventory may prove elusive as we approach the latter stages of summer," said Ratiu.