Rising mortgage rates are starting to become a problem

One of the pillars of the U.S. economic recovery during the covid-19 pandemic is starting to crack.

The red-hot U.S. housing market, fueled by record-low interest rates, is one of the most important stories of the past year when it comes to understanding the sharp rebound in financial markets and the relatively pristine condition of many household balance sheets. The Freddie Mac 30-year fixed mortgage rate started 2020 at 3.72%, just 40 basis points above its all-time low, and plunged to 2.65% by the start of this year. That drop in borrowing costs led to all sorts of astounding figures: The largest quarterly volume of mortgage originations in history; the most refinancing in a year since 2003; the most debt taken on by first-time buyers on record; and a collective $182 billion of home equity withdrawn during 2020, or an average of about $27,000 for each household.

These trends are quickly shifting just a few months into 2021. U.S. mortgage rates have increased for six consecutive weeks, to 3.17%, the highest level since June. The 50-day moving average was steady at 2.94% in the week through March 25, the first time it hasn't moved lower since early 2019. Other longer-term averages have also plateaued. The message is clear: The absolute low for U.S. mortgage rates appears squarely in the rear-view mirror.

Not surprisingly, this trend has squashed the refinancing demand that prevailed throughout 2020. Refinances as a percentage of total mortgage applications have declined for seven consecutive weeks to 60.9%, the lowest since July, in a streak that rivals the longest of the past decade and will probably only continue. The days may also be numbered for cash-out refinancing, which is when someone not only cuts the interest rate on their loan but also increases the size of their new mortgage by borrowing against equity...