A definitive rise in mortgage interest rates over the last month is keeping borrowers at bay. Loan application volume fell 3.2 percent last week from the previous week on a seasonally adjusted basis, according to the Mortgage Bankers Association. Volume is now skewing toward larger loans for more expensive homes.
Refinance applications, which are most rate-sensitive, decreased 5 percent from the previous week, seasonally adjusted to the lowest level since early September. They are still 4 percent higher compared with one year ago, when interest rates were slightly higher. The refinance share of mortgage activity now stands at 58.7 percent of total applications.
"The 30-year fixed rate has increased almost 20 basis points since a recent low, and the refinance index has decreased in four of the last five weeks," said Michael Fratantoni, the association's chief economist.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.14 percent from 4.18 percent, with points increasing to 0.49 from 0.45 (including the origination fee) for 80 percent loan-to-value ratio loans.
Applications to purchase a home fell 1 percent from the previous week but are still 24 percent higher than the same week one year ago.
"Average purchase loan size climbed to a new survey high last week, as the higher end of the market continues to grow more quickly than the entry level," Fratantoni said.
Higher home prices are preventing some entry-level buyers from making a strong showing in the fall market. Tight supply of homes for sale pushed the S&P/Case Shiller national home price index up by 4.9 percent in September compared with a year ago. That is a wider annual gain than was measured in August.
The Federal Reserve is showing strong signs that it will raise long-term interest rates at its next meeting in December. That has some homebuyers rushing to get in while rates are still low, but they may not have to.
"While this will make news, it is not likely to push mortgage rates far above the recent level of 4 percent on 30-year conventional loans. In the last year, mortgage rates have moved in a narrow range as home prices have risen; it will take much more from the Fed to slow home price gains," said David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices.
Read MoreHome sales stall in October
The hope in the housing market now is that higher prices and regained home equity will tempt more sellers. Inventory of homes for sale fell again in October, according to the National Association of Realtors. It usually rises this time of year. If the drops continue, competition will be fierce in the busier spring market, pushing prices even higher.