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Mortgage Rates Skyrocketing, But Home Demand Still Solid

The biggest single-week spike in mortgage rates in more than two years wasn't enough to discourage people from buying homes last week, a sign the expected slowdown in Federal Reserve stimulus won't snuff out the housing recovery.

The average interest rate on a 30-year fixed-rate mortgage leapt to 4.46%, the highest since August 2011, from 4.17% the week before, the Mortgage Bankers Association said Wednesday. That 29-basis-point surge was the most since a 32-point jump in early 2011.

Rates have been climbing since Fed Chairman Ben Bernanke suggested last month that bond purchases, or quantitative easing, could slow soon. Then he said last week QE could be tapered until it ends by mid-2014, causing rates to shoot up more.

But MBA's mortgage application index for purchases increased 2% from the prior week, and is up 16% from a year ago, "indicating that homebuyers are not yet dissuaded by the increase in mortgage rates," said Mike Fratantoni, MBA's vice president for research and economics, in a statement.

Conventional purchase loans financed via private lenders grew by 3% from a week earlier, while government-backed loans continued to fall on higher Federal Housing Administration mortgage-insurance premiums.

Refinancing suffered again, with applications down 5.2%, the seventh decline in the last eight weeks. As a result, MBA's overall index fell 3%.

Homebuilder Lennar (LEN) said Tuesday that higher mortgage rates have had "very little impact on sales or pricing" so far on the heels of strong Q2 results. It also said new orders were up 27% from last year, and backlogs were 76% higher.

Rising mortgage rates after a long slide may be spurring people to rush to buy now before borrowing costs rise.

But the average buyer faces other obstacles. Investors have drawn down the supply of lower-priced homes and are snapping up dwindling bargains from short sales and foreclosures.

Homes are rapidly getting pricier too, and the mortgage-rate spike will erode affordability further, especially as income growth remains weak.