Mortgage rates spiked this week, rising at the fastest pace since 2010, in sharp response to the Federal Reserve’s announcement last Wednesday that it could begin to taper its bond-buying program this year.
The 15-year average also increased to 3.5 percent, up from 3.04 percent last week. It averaged 2.94 percent last year. Hybrid adjustable rate mortgages also rose this week. The average five-year ARM increased to 3.08 percent from 2.79 percent last week, while the one-year ARM averaged 2.66 percent, up from 2.57 percent last week.
“Higher mortgage rates may dampen some housing market activity but the effect will be muted by the high level of buyer affordability, and home sales should remain strong,” Frank E. Nothaft, Freddie Mac vice president and chief economist, said in a statement.
Low mortgage rates have provided a critical boost to the housing market, which in turn has helped lift the economy.
High rates have already started to dampen demand among some potential homebuyers. The number of mortgage applications and refinancing applications dropped to their lowest levels in two years, according to the latest figures from the Mortgage Bankers Association.
Mortgage applications decreased 3 percent from last week, and refinancing applications fell 5 percent, following the Federal Reserve’s policy announcement. Refinancing applications have been trending down the last three weeks and have fallen more than 30 percent since the beginning of May.
“Total purchase applications were 16 percent higher than one year ago, indicating that homebuyers are not yet dissuaded by the increase in mortgage rates,” Mike Fratantoni, the association’s vice president of research and economics, said in a statement.
Last week, Federal Reserve Chairman Ben S. Bernanke said the central bank would consider pulling back its stimulus measures as early as the end of this year, provided the economy continues to improve. On Tuesday, a revision of the country’s annual growth rate showed that the economy grew a sluggish 1.8 percent in the first quarter, far lower than the original estimate of 2.4 percent.
The Federal Reserve is also watching interest rates closely as it decides when to start scaling back its bond buying program.