Dire predictions for housing recovery

The housing recovery is in for a major pause due to higher mortgage rates. It is not in the numbers now, and it won't be for a few months, but it is coming, according to one noted analyst. The market has seen rising rates before, but never so far so fast; there is no precedent for a 45 percent spike in just six weeks. The spike is causing a sense of urgency now, a rush to buy before rates go higher, but that will be short term. Home sales and home prices will both come down if rates don't return to their lows, and the expectation is that they will not.

Where is the proof of this? We only need look to the $8,000 home buyer tax credit that expired in 2010. The falloff was dramatic.

"That stimulus was so small compared to a 3.5 percent interest rate, it's almost not even a comparable, but it's the only thing I can find," said Mark Hanson, a well-known mortgage analyst in California who predicted many aspects of the mortgage market crash. "When that stimulus went away, new home sales fell 38 percent in a single month, down 25 percent year-over-year, and existing home sales fell 30 percent over a single month, 24 percent year-over year."

(Read More: Rising Rates Sour Housing Market Plans)

FredFroese | E+ | Getty Images

Hanson is predicting a 19 percent jump in contract cancelations for the home builders for sales made between December 2012 and June of this year. That is because 70 percent of homes sold in that time were not built yet, and buyers had not locked in rates. As for the home builder stocks, he said they are, "priced for perfection" according to sales from the past years, but those sales won't hold up.

The predictions may sound dire, but the forward-looking indicators are falling in line. Mortgage applications have been falling for the past month. Applications to purchase a home are down 28 percent in the past month and up only 4.5 percent from a year ago. They should be up far higher, given that prices and demand are rising so fast. Signed contracts to buy existing homes jumped unexpectedly to a six-year high in May as rates started to rise; there's your rush.

At a brokers open house in Northern Virginia this week, real estate agents said they are already seeing the effects of higher rates on the ground and in the homes they're trying to sell.

(Read More: Apartments Reap Rewards of Rising Rates)

"It has gotten a lot quieter, which is a shame because historically the rates are still very low," said Ruth Griel with Prosperity Mortgage.

"It's having a kind of chilling effect on the market," said Mark Beardsley, a Realtor with Long and Foster. "What's happening is we are pricing down. If they were qualified for 600, now we're looking at 550 and below."

Mortgage rates going from 3.5 to 5 percent is roughly a 15 to 20 percent decrease in what the average buyer can afford. They can move to different loan products, like an adjustable rate loan, but ARMs are harder to qualify for and require far more documentation.

Rising rates are the number one worry for the majority of buyers right now, according to a new survey by Trulia, an online real estate company. 56 percent of consumers they surveyed said they would be discouraged from buying if rates reach 6 percent. Trulia's chief economist, however, is not concerned.

"By design, the strengthening economy should boost housing demand at the same time that rising rates dampen housing demand," he wrote in a post on Trulia.com. He also said that the drop in refinances will cause banks to go looking for business and potentially loosen up a bit on lending.

The trouble is that as rates jump, so too do home prices. A continuing lack of for-sale listings has buyers bidding up prices.

(Read More: Map: Tracking the US Real Estate Recovery)

Why is there so little inventory? Too many homeowners have too little equity to consider a move up and others are afraid they won't be able to find anything to move up to. While supplies increased slightly in the Spring, the Realtors do not expect a significant number of new listings to come onto the market as we head into the traditionally slower fall season.

Prices are moving up faster than income growth and faster than employment growth. Even the Realtors have said they are overheating. Buyer demand is clearly there, a lot of pent-up demand from the housing crash, but demand that will have a price cap. Yes, mortgage rates were at 6 percent for much of the 2000's and higher than that in the 1980s and 1990s, but 3.5 percent became the new normal, and a lot of demand was pulled forward at that rate. This housing recovery was easy at 3.5 percent. It will be far harder at 5.

By CNBC's Diana Olick. Follow her on Twitter @Diana_Olick or on Facebook at facebook.com/DianaOlickCNBC.

Questions? Comments? RealtyCheck@cnbc.com