Mortgage rates edged closer to 3% this week, pulling further away from the historic lows reached at the beginning of January.
The average rate on the 30-year fixed mortgage — the most common home loan — jumped to 2.97% from 2.81% the week before, according to Freddie Mac, a government-sponsored agency that guarantees millions of mortgages. That's the highest level since mid-August.
"The market was responding to a couple key factors of economic growth — and good news for the economy usually means higher mortgage rates," Christian Wallace, head of sales at the digital homeownership company Better.com, told Yahoo Money, noting another round of potential government stimulus and the largely smooth rollout of the COVID-19 vaccine. "Much of the economy’s recovery depends on that rollout, so its progress is likely to push rates up."
Still, the recent increase in rates dampened demand for refinances and home purchases alike. Homeowners and buyers had pounced when rates hit an all-time low of 2.65% in the first week of January.
The volume of refinances dropped 9% last week from the previous one, according to the Mortgage Bankers Association Index that measures new mortgage activity. Applications for mortgages to purchase new homes also were lower by 12%, seasonally adjusted.
While economists expect higher rates will continue throughout the year as the economy begins to recover from the pandemic, the uptick won't be without starts and sputters.
"While we expect generally higher rates this year, we don't expect rates to move up without ever dipping back," Danielle Hale, chief economist for Realtor.com, told Yahoo Money. "It's likely that we won't see new all-time lows, but it's also possible that rates will fall back in the weeks ahead before picking up again."
'They should consider a range of possible rates'
Homeowners looking to refinance need to be prepared to act quickly when rates get to a level that makes getting a new home loan financially beneficial. Additionally, 14.8 million qualified homeowners could shave their interest rate by three-quarters of a point at current rates, according to figures provided to Yahoo Money from Black Knight Inc., a data analytics company.
For potential buyers coming into the spring buying season, rates are still favorable — near historic lows, Hale said. Other factors also determine what mortgage rate a buyer will get such as the size of down payment, how much other debt they carry, and their credit score.
"For would-be buyers, today's data is a reminder of just how much rates can move from week to week, so they should be prepared and know what different rates mean for their monthly budget and target house price," Hale said. "They should consider a range of possible rates, so they'll know how sensitive they need to be to changing rates and how much wiggle room they want to leave in their monthly budget and target house price."
Hale's forecast for mortgage rates remains unchanged, with rates averaging 3% for the year and ending 2021 around 3.4%, nearly the same level seen a year ago today.
The largest challenge for buyers remains actually finding a home to buy, according to Francesca Ortegren, a data scientist at Clever Real Estate. At the end of January, the number of homes for sale dropped by 25.7% year over year — a record decline — to a historic low of 1.04 million units, according to the National Association of Realtors.
"The biggest hinderance for buyers this year will be competition from other buyers," Ortegren said, "as we continue to see fewer homes on the market than average throughout the pandemic and expect that to continue through the spring."