This is the first sign of the impact of the sharp rise in interest rates, which has flowed through to mortgage rates. It is also something that might make the Fed nervous about how quickly markets have moved, as a stronger housing market is central to driving a more robust recovery in 2014.
This is only one month of data and it may be the case that potential homebuyers have waited to see at what level mortgage rates stabilise at before finalising purchases. So it may be the case that underlying demand for homes is still improving, but has been pushed back a little given how quickly rates have risen.
But even though this isn't a definitive weaker trend, the balance of risks to the outlook will have to be carefully weighed by the Fed with regards to policy. Growth has been below forecast. Inflation continues to be weak. Talk of tapering bond purchases has also had an outsized effect on yields, which are not just the product of more optimism on the economy.
Bonds have rallied sharply on the report by 8-10bps and it certainly makes the prospect of tapering in September less likely.
