Mortgage rates have moved to their highest level in more than a year, and that may have potential homebuyers nervous that their affordability window is closing faster than expected. Home prices are still gaining, and winter is historically the slowest season for the housing market, but mortgage demand from buyers moved higher.

Last week purchase loan application volume rose 2% compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. This jibes with anecdotal comments from real estate agents that they are seeing higher-than-normal early January demand. Applications were still 17% lower than the same week one year ago, but some of that is due to much lower supply in the market. Supply usually increases in December, but it did not last month.

This, as the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) increased to 3.52% from 3.33%, with points decreasing to 0.45 from 0.48 (including the origination fee) for loans with a 20% down payment. That is the highest rate since March 2020. It was 64 basis points lower the same week one year ago.

“Mortgage rates increased significantly across all loan types last week as the Federal Reserve’s signaling of tighter policy ahead pushed U.S. Treasury yields higher,” said Joel Kan, an MBA economist. “The housing market started 2022 on a strong note. Both conventional and government purchase applications showed increases, with FHA purchase applications increasing almost 9%, and VA applications increasing more than 5%.”

FHA and VA loans are low and no down payment options often used by first-time buyers.

Applications to refinance a home loan fell 0.1% from the previous week and were 50% lower than the same week one year ago. Refinance volume is now at the lowest level in more than a month. As mortgage rates rise, fewer and fewer borrowers can benefit from a refinance.

Mortgage rates rose sharply on Monday of this week, according to Mortgage News Daily, but settled back slightly on Tuesday.

“The big question now is whether the worst is now over for this abrupt move toward higher rates. The answer is a definitive ‘maybe!’ It might even be ‘probably,'” wrote Matthew Graham, chief operating officer at Mortgage News Daily. “Unfortunately, that doesn’t mean rates can’t go higher, simply that the pace may be moderating from here.”