Rising mortgage rates a problem for housing economy

>>> we're back now with a rapid rides in mother-in-law rates. analyst say it points to a stronger economy. but the real estate correspondent reports it's potentially short circuiting the housing recovery.

>> nice corner lot with --

>> reporter: these people have been house hunting for two months. now they're looking for a bit less home.

>> it's hard. because you see the houses that you want, and you knew at one point you probably could afford them and now you can't.

>> reporter: mortgage rates have jumped for than a full percentage point since may. so payments on a $200,000 home we want unmore than $120 a month. the federal reserved announced it would be pulling money out of the mortgage market which had been burning rates to record lows.

>> my biggest concern is we're not going to have demand anywhere remotely close to what we had when this super fuelled sim luis was in place.

>> reporter: to make it worse, mortgage rates are rising along with home prices which are up over 12% from a year ago. potential buyers are losing purchasing power by the day.

>> with all of the homes we're giving up something, usually it's the location, kitchen.

>> location is usually the first thing to go.

>> reporter: this week the fed chairman urged caution.

>> i think we need to monitor the housing market .

>> reporter: this family already knows the impact. owing more on their mortgage than their home it worth, they hope to refinance for a lower monthly payment.

>> we pretty much missed the boat . it just doesn't make sense for us to go forward.

>> reporter: despite the recent rides, rates are still historically low. record low rates have become the new normal. not to mention the fact that buyers today need a lot more in the way of cash down and high credit scores to qualify for the low rates.

>> we're losing our dream of getting a home each time it goes up.

>> reporter: for those on the march of homeowner ship, every point