Originally Published: 16 MAR 23 12:00 ET

By Anna Bahney, CNN

(CNN) -- Mortgage rates dropped this week in the wake of several bank failures, reversing course after rising half a percentage point over the past month. But longer-term uncertainty is expected to hamper many homebuyers and keep the cost of buying unaffordable for many.

The 30-year fixed-rate mortgage averaged 6.60% in the week ending March 16, down from 6.73% the week before, according to data from Freddie Mac released Thursday. A year ago, the 30-year fixed-rate was 4.16%.

After hitting a 2022 high of 7.08% in November, rates had been trending down. However, they started climbing again in February, rising half a percentage point over the past month. Robust economic data suggested the Federal Reserve is not done in its battle to cool the US economy and will likely continue hiking its benchmark lending rate.

But that was before several banks collapsed over the past week. This led investors to flock to the safe haven of Treasury bonds, which pushed yields down and mortgage rates have followed.

"Turbulence in the financial markets is putting significant downward pressure on rates, which should benefit borrowers in the short term," said Sam Khater, Freddie Mac's chief economist.

The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit.

All eyes on the Fed

"The flight to government bonds resulted in yields on the 10-year Treasury note falling from near 4% at the beginning of last week to 3.4% by mid-week, thereby reversing the recent trend of climbing mortgage rates," said Hannah Jones, economic research analyst at Realtor.com.

The events of the past week, ranging from strong economic indicators to unforeseen events in banking, sent mortgage rates down.

"At the beginning of last week, Federal Reserve Chair Jerome Powell suggested that more aggressive rate hikes may be necessary to rein in inflation, which led to a sharp drop in the stock market and an increase in mortgage rates," Jones said.

"However, at the end of the week, the failure and resulting bailout of Silicon Valley Bank led to heightened investor concern of additional bank closures, which pushed activity towards Treasury bonds, resulting in dropping yields on the 10-year Treasury and a decrease in mortgage rates," she said.

This past week, economic data on February's joblessness and inflation levels both pointed to an economy that is still hot, though slowly cooling.

"All else being equal, this would likely mean a more aggressive rate hike at next week's FOMC meeting," Jones said, referring to the Fed's policymaking meeting on March 21-22. "However, in light of last week's bank failures, the committee may choose to remain conservative to ensure stability in the economy."

The Fed does not set the interest rates that borrowers pay on mortgages directly, but its actions influence them. Mortgage rates tend to track the yield on 10-year US Treasury bonds, which move based on a combination of anticipation about the Fed's actions, what the Fed actually does and investors' reactions. When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.

Home buyers are rate sensitive

The slight dip in mortgage rates caught the attention of home buyers, pushing up mortgage applications for the second week in a row, according to a separate report released Wednesday by the Mortgage Bankers Association.

"Both home-purchase and refinance activity saw gains last week but remain below year-ago levels," said Bob Broeksmit, CEO of the Mortgage Bankers Association. "Anticipated further rate declines may spur additional application gains as the spring home buying season begins."

Lower mortgage rates in December and January were coupled with an increase in housing demand, said Jones, but ongoing economic uncertainty may have stifled some home buying activity.

"As winter turns to spring, buyers and sellers tend to re-enter the housing market," said Jones. "This year, both prices and mortgage rates are higher than a year ago, resulting in a 50% increase in housing costs for the typical US home. This widespread unaffordability means that buyers are likely pickier when choosing to submit an offer. Sellers can drum up buyer demand during the approaching best time to sell by ensuring their home is well-priced and well-maintained."