Mortgage rates reversed course this holiday week, but the damage from high interest rates was already done and rates could move higher still.
The 30-year fixed-rate mortgage (FRM) averaged 4.29 percent with an average 0.7 point for the week ending July 3.
That was down from last week when it averaged 4.46 percent, the highest level since mid-2011, according to Freddie Mac's Primary Mortgage Market Survey.
Last year at this time, the 30-year FRM averaged 3.62 percent.
"Fixed mortgage rates fell over the holiday week as market concerns over the timing of the Federal Reserve's pullback in bond purchases eased somewhat, said Frank Nothaft, vice president and chief economist at Freddie Mac.
Unfortunately, more than a month of rising interest rates , pushing rates up a full percentage point, refinance activity tanked by 29.5 percent for the month of June.
Refinancing fell 15.6 percent last week alone, after rates peaked for the year at 4.46 percent, according to the Mortgage Bankers Association (MBA)
Still higher rates forecast
For homeowners who procrastinated about refinancing, the record low interest rate boat has left the dock. That one percent increase in mortgage rates isn't likely to come sailing back to port.
To the contrary, Capital Economics expects rates to end the year at about 4.5 percent, move to 5 percent next year and inch higher toward 5.5 percent by 2015.
If employment improves, if the economy picks up steam and if the Federal Reserve begins to ease off its $85 billion monthly bond-buying program, all bets are off. Rates could move higher, faster.
Fortunately, home buying wasn't hampered as much by higher mortgage rates. Home buying mortgage applications crept up by 0.1 percent in June compared to May. They were off by 3.1 per in the most recent weekly figures, but remain 12.3 percent higher than a year ago.
Capital Economics surmised the rise in rates is pushing fence perching homebuyers to fly before rates rise more and cage them in a rental or their parents' home.
"But the bigger point is that, with rates still at historically very low levels and affordability favorable, there's no reason that housing demand cannot continue strengthening," Capital Economics reports.
Other benchmark rates
Freddie Mac also reported the 15-year FRM averaged 3.39 percent with an average 0.7 point the week ending July 3. That was down from an average 3.50 percent last week. A year ago at this time, the 15-year FRM averaged 2.89 percent.
However, the 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) average was up to 3.10 percent, with an average 0.7 point. Last week it averaged 3.08 percent, 2.79 percent a year ago.
Finally, the 1-year Treasury-indexed ARM average was unchanged at 2.66 percent July 3, with an average 0.4 point. At this time last year, the 1-year ARM averaged 2.68 percent.
Nothaft echoed Capital Economics' sentiments.
"Rates are still low by historical standards and should continue to aid in housing affordability and the ongoing recovery of the housing market. For instance, pending home sales rose 6.7 percent in May to the strongest pace in over six years. In addition, residential construction spending increased in four of the first five months this year," he said.