Worries the Federal Reserve may begin to slow its stimulus efforts sent U.S. mortgage rates last week to their highest level in a year, a surge that could be a headwind to the nascent housing recovery should they march much higher.
At the same time, the jump in rates appears to have spurred some prospective buyers to lock in cheaper prices while they can, according to data from the Mortgage Bankers Association released on Wednesday. The MBA said interest rates on fixed 30-year mortgage rates surged 12 basis points to average 3.90 percent in the week ended May 24. It was the highest level since May of last year and the biggest jump in 14 months.
If mortgages were to get markedly more expensive from their recent record lows, that could price some buyers out of the market and put a dent in a housing comeback still in its early stages. Analysts, however, said rates were unlikely to continue to rise at such a fast pace.
Rates also remain low by historical standards and homes look affordable with prices back at only 2003 levels. Combined with demand from potential homeowners who have been waiting for the housing market to stabilize before buying, the increase in rates could prompt shoppers to jump in over the short-term.
"People who were on the fence, they tend to get a sense of urgency as they see interest rates rise," said Bob Walters, chief economist at Quicken Loans. Rates averaged between 5 and 6 percent over the last decade, Walters said.
Indeed, the MBA's gauge of loan requests for home purchases rose 2.6 percent last week, even as refinancing applications tumbled 12.3 percent. The overall index of mortgage application activity was down 8.8 percent.
Fed chairman Ben Bernanke said last week the Fed could scale back the pace of its bond purchases at one of the "next few meetings" if the economic recovery looked set to maintain forward momentum. Along with improving economic data, the comments sowed concerns among investors that the Fed's ultra-loose policy could end sooner than expected.
The Fed is currently buying $85 billion a month in bonds and mortgage-backed securities as it seeks to keep borrowing rates low. Analysts said the Fed would likely be at pains to make sure any withdrawal of its bond buying program did not shock the market.
"Before the Fed actually does anything, we will get more signs, more warnings like this, so by the time something actually happens everything will be built into the market," said Polyana da Costa, senior mortgage analyst at Bankrate.com.
Rates are unlikely to keep going up so quickly and should remain below 5 percent, da Costa said.
"I don't think we have an economy that would support that and I think if it got to that point, the Fed will step in again," she said.
Bernanke also suggested last week the Fed could refrain from selling off some of the mortgage-backed securities it has acquired when the time comes to tighten monetary policy. Rates had already been on the rise before Bernanke's comments and have gained 31 basis points since the start of the month, according to MBA.
The low rates combined with a number of other factors have helped the recovery in the housing market gain traction over the past year. Prices have climbed, foreclosures have slowed, inventories have tightened and more homeowners are back above water on their loans.
"While the move in rates could cause some near-term hiccups in housing demand, we do not think that it will change the broader story of increasing homebuyer activity," said Michael Feroli, an economist at JPMorgan in New York.
While more expensive rates could squeeze out some buyers at the margin if they can no longer afford the home, those that have waited to refinance their current mortgage could have the most to lose, said Walters.
"They need to move," he said.