The average mortgage rate hasn't risen this high since the end of July 2020. Higher rates signal an economy that's slowly regaining its footing, noted Sam Khater, Freddie Mac's chief economist, reported by HousingWire.

Rising rates certainly didn't slow new home sales in January. The U.S. census bureau reported sales of new single-family houses in January were at a seasonally adjusted annual rate of 923,000 — 4.3% above December's rate.

"However, recent increases in mortgage interest rates threaten to exacerbate existing affordability conditions. Builders are exercising discipline to ensure home prices do not outpace buyer budgets," said National Association of Home Builders Chief Economist Robert Dietz.

While purchase demand hasn't shown any sign of decline, the refi wave is showing more vulnerability. As rates rose, refi activity fell 11% according to data from the Mortgage Bankers Association.

Do higher mortgage rates mark the end of the refi wave? 

We may never again see a year like 2020. That's somewhat somber news for the lenders who benefited from a series of downright strange conditions and record low mortgage rates to generate more refi business than anyone in March could have imagined, as reported by HousingWire.

Both Fannie Mae and Freddie Mac reported that refis made up about 70% of their mortgage activity in 2020, driven by weeks upon weeks of record low mortgage rates.

However, despite a rise in overall mortgage applications over the last week, the Mortgage Bankers Association reported that refinance activity waned with rising rates. As of Monday, the average 30-year fixed refinance climbed to 3.07%, well above Freddie Mac's PMMS low of 2.65% in January.

For many potential borrowers, the opportunity to refinance is lost before the chance even arises, while other prospective borrowers got caught in a clogged loan pipeline and don't get the opportunity to lock in that low rate.

"There's a lot of floating loans out there, and those pipelines are going to get hit if rates keep on going up," said HousingWire lead analyst Logan Mohtashami.

Pending home sales drop, but there's a silver lining

For the fifth consecutive month, U.S. pending home sales dipped – this time, down 2.8% in January from December, according to a report from the National Association of Realtors. And inventory shortages are the culprit, according to HousingWire.

Despite the decline, many industry observers see big potential for the housing market in the year ahead.

It's no secret that low mortgage rates and societal shifts brought on by COVID-19 have collided to form a red-hot housing market. But many would-be buyers have also been thwarted by comically low resale inventory, as well as supply chain constraints and escalating materials costs that have made life difficult for homebuilders. January was illustrative.

"Pending home sales fell in January because there are simply not enough homes to match the demand on the market," said Lawrence Yun, NAR chief economist. "That said, there has been an increase in permits and requests to build new homes."

And even with another month-to-month drop, pending home sales were 13% higher in January 2021 than they were in January 2020.

"There will also be a natural seasonal upswing in inventory in spring and summer after so few new listings during the winter months," Yun said. "These trends, along with an anticipated ramp-up in home construction will provide for much-needed supply."

Weekly mortgage rate update 

The economy is slowly starting to regain its footing, affecting mortgage rates. And although rates are continuing to rise, they still remain near historic lows. However, when you consider the demand-fueled rising home prices and lack of inventory, these rising rates become a limiting factor for how competitive a homebuyer can be and how much house they are able to purchase.  The Freddie Mac weekly survey shows the average rate for a 30-year fixed mortgage is 2.97%, which is 0.16 points higher than last week, and down 0.48 points from this time last year.