Fear of even higher mortgage rates may be heating up winter homebuying

There is a sign in the front yard of a home for sale.

Potential homebuyers may be nervous that their affordability window is closing faster than expected, because mortgage rates have moved to their highest level in more than a year. Home prices are still gaining, and winter is historically the slowest season for the housing market, but mortgage demand from buyers moved higher.

Purchase loan application volume increased 2% last week compared with the previous week, according to the Mortgage Bankers Association. Real estate agents anecdotally say they are seeing higher-than-normal early January demand. Some of the lower applications are due to the lower supply in the market. In December, supply usually increases, but not last month.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances increased to 3.52% from 3.33%, with points decreasing to 0.45 from 0.48 for loans with a 20% down payment. That is the highest rate since March 2020. It was 64 basis points lower a year ago.

The Federal Reserve signaling of tighter policy ahead pushed U.S. Treasury yields higher last week, causing mortgage rates to increase across all loan types. The housing market started strong. Both conventional and government purchase applications showed increases, with the VA application increasing more than 5%.

Many first-time buyers use VA and FHA loans with no down payment.

The number of home loan applications fell from the previous week and were half the number from a year ago. The volume of refinances is at its lowest level in more than a month. Fewer and fewer borrowers can benefit from a mortgage refinance as mortgage rates rise.

Mortgage rates rose sharply on Monday, but settled back slightly on Tuesday.

The big question is whether the worst is over for this sudden move toward higher rates. The answer is definitely a possibility. Matthew Graham, chief operating officer at Mortgage News Daily, wrote that it might be. That doesn't mean rates can't go higher, just that the pace may be slowing.