After years of low-and-lower the 30-year fixed rate shot up from a low of 3.35% in early May to 4.51% in early July according to Freddie Mac. The rate increase was sudden and steep, but not a great surprise. Many forecasters had been expecting rates to go up due to:
1) The strengthening economy
2) The Fed being expected to pull back on bond-buying and other measures that have kept rates low
By historical standards, rates are still low (mortgage rates hovered around 6% for most of the 2000s, 7-9% in the 1990s, and above 10% in the 1980s). Nonetheless, the recent rate climb has been steep
Trulia surveyed more than 2,000 people in June, after rates rose sharply. Their results showed that among all consumers who plan to buy a home in the future, 41% said their top worry is that mortgage rates would rise before they actually bought. The next biggest worries were that prices would rise before they actually bought (37%) and that they wouldn’t find a home for sale that they like (36%).
Among consumers who plan to but a home, 13% said that mortgage rates of 4% were already too high for them to consider buying a home. Another 20% said they’d be discouraged from buying a home if rates reach 5%; yet another 22% said they’d be discouraged from buying a home if rates reach 6%. Combining these groups, 56% of consumers who plan to buy a home someday would be discouraged from doing so if rates reach 6%.
In the short term, however, if consumers expect rates to rise further, some might rush to buy, which could boost sales and home prices temporarily
So far there little any sign of change in applications by prospective homebuyers.  The Mortgage Bankers’ Association (MBA) index for home-purchase mortgage applications in June rose 2% month-over-month and 11% year-over-year.  The main impact of higher rates has been on refinances. The MBA’s refinance mortgage applications index in June fell 24% month-over-month and 40% year-over-year. Both low mortgage rates and expanded eligibility rules for government-sponsored programs have encouraged refinancing over the past couple of years. With rising rates, few people who haven’t refinanced already will do so now.
There are some silver linings for prospective homebuyers though:
• Mortgage rates are rising alongside a strengthening economy
• As refinancing demand dries up, banks look to expand their home-purchase lending instead and credit may become available to those currently frozen out of the mortgage market due to extremely strict underwriting conditions.
• Buying is still cheaper than renting. Even with a 4.5% 30-year-fixed mortgage, buying is 37% cheaper than renting nationally; because a 4.5% rate is still low by historical standards, and prices are still modest relative to rents. Nationally, renting doesn’t get cheaper than buying until rates reach 10.5%, though the tipping point is below 6% in high priced areas such as the Bay Area and Honolulu.
Overall, rising mortgage rates will help slow down recent home price gains and should help the market stabilize. Rising rates will put homeownership out of reach for some consumers, but the strengthening economy and the possibility of easier mortgage credit could keep some discouraged homebuyers in the game