NEW YORK (MainStreet) — The latest data from the Mortgage Bankers Association show mortgage applications plunged almost 5% in the week that ended June 26 while mortgage rates ticked up to their highest level since last October. The decline could be an ominous sign of what's to come when the Fed starts raising rates later this year.

The MBA's Weekly Mortgage Applications survey shows its Market Composite Index, which measures mortgage loan volume, declined 4.7% on a seasonally adjusted basis. The volume of refinancings fell off more sharply than new home purchases: The Refinance Index, which measures refinancing volume, declined 5% to its lowest level since December 2014 while the Purchase Index dropped 4%.

All of this came as budding homebuyers grappled with higher mortgage rates: The average 30-year fixed-rate mortgage rose to 4.2% - its highest level since October 2014. 

"Rates drifted up further last week due to stronger U.S. economic data, even with the worries about a potential default of Greek debt this week," said Mike Fratantoni, the MBA's chief economist. Although purchase volume was down week-over-week, he noted that it was still up 14% from the same period a year ago on an unadjusted basis. 

The data is the latest indication that the country's housing recovery remains on shaky ground. The stop-start recovery has been rocky. 

But one week doesn't make a trend, according to Bob Curran, a managing director at Fitch Ratings. "The weekly numbers have been pretty erratic," he said.

Higher interest rates alone won't make or break a buyer's decision to buy a home.

Employment, home prices, wage growth and credit standards all factor into the affordability equation.

If higher rates simply reflect better economic times, "the benefits from that stronger economy are going to outweigh somewhat higher rates," said Fratantoni. He says short-term rate hikes are necessary to prevent inflation and maintain price stability in the economy. "If the Fed were late to move, I would worry about bond markets and longer-term rates moving ahead of the Fed," he said. "We could get a spike in rates if people lose confidence in the Fed's ability to control inflation." 

If, however, the rate increases don't come with higher employment and wages, or if they come faster and bigger than forecast, they could stymie the housing market's rebound.

"If it's meaningfully higher rates, it's going to have an impact," said Curran. Back in 1994, mortgage rates surged about 220 basis points in one year to 9.2% from 7%, he recalled. The following year, home sales plunged.

Curran is expecting 30-year mortgage rates to tick up 30 to 40 basis points this year, which would still keep rates low by historic standards. It's the size and speed of the rate increases that affect a buyer's psyche, he emphasized. "It's tough when it's a substantial move in a short period of time," he said.

Meanwhile, the jobs picture is looking brighter. The latest ADP National Employment Report, released Wednesday, shows the private sector added 237,000 jobs on a seasonally adjusted basis in June, exceeding economists' projections of 218,000 jobs. It was the third consecutive month of improvement since the March slump.

The national unemployment rate stood at 5.5% on a seasonally adjusted basis in May, up from 5.4% in April, but down from 6.3% a year earlier, according to the U.S. Bureau of Labor Statistics.

Also, home price increases are slowing. The latest S&P/Case-Shiller Home Price Index shows home prices rose 4.2% in the 12 months that ended in April, which is slightly weaker than the 4.3% year-over-year increase posted in March - and a far cry from the double-digit pace of 2013.

All of this is good news for homebuyers.

Back in 2013, buyers worried that the market was getting overheated as home prices soared at a far faster pace than wages were rising. If this had continued, it would have priced many buyers out of the market.

"Since late 2013 the year-over-year gains have dropped from an unsustainable double digit pace and now may be leveling off with annual increase of about 4%. However, 4% is still more than double the rate of inflation," said David Blitzer, chairman of the Index Committee at the S&P Dow Jones Indices, in a statement.

Fratantoni expects mortgage rates to hit 5% by the end of next year. "However, if we jump up to 6 or 6.5 percent, that would really put the brakes on this housing market recovery."

This article is commentary by an independent contributor. At the time of publication, the author held TK positions in the stocks mentioned.