Homebuyers are trickling back into the mortgage market, but not enough to offset the industry's steep and steady drop in refinance business.
Total mortgage application volume was essentially flat last week, falling just 0.8 percent from the previous week. The seasonally adjusted tally from the Mortgage Bankers Association was 11 percent lower than the same week one year ago, on weakness in refinancing.
A small drop in interest rates did nothing to spur refinances. Those applications fell 3 percent and are down nearly 26 percent from the same week a year ago, when mortgage rates were higher. The refinance share of total applications fell to the lowest level since 2008.
Mortgage bankers are feeling the pinch of less refinance business, and some predict they will, in turn, have to get more competitive on the purchase side to make up for the lost business. That could lead to a slight easing in today's tight credit conditions.
Mortgage applications to purchase a home rose 1 percent for the week and are 4 percent higher than a year ago. Purchase applications could be stronger if there were simply more homes for sale. There is strong spring demand this year, but listings are falling in most major markets, resulting in higher prices and weaker affordability.
Homebuyer demand rose sharply in February from a year ago, according to a monthly survey by Redfin, a real estate brokerage. Agents saw a 26 percent jump in the number of home tour requests. Demand, however, did fall slightly from January's record high, likely due to the lack of listings.
"The only factor holding back sales this spring is supply," said Redfin chief economist Nela Richardson. "Limited inventory, particularly for starter homes, has put a crimp in the 2017 market. We expect to see more listings hit the market this spring, but there will still not be enough inventory to match homebuyer demand."
Potential buyers in several surveys have named supply as the primary headwind in the current market. Rising mortgage rates do not seem to be a major factor. Rates turned down slightly last week. The average contract interest rate for 30-year, fixed-rate mortgages with conforming loan balances of $424,100 or less decreased to 4.33 percent from 4.46 percent, with points increasing to 0.43 from 0.41, including the origination fee, for 80 percent loan-to-value ratio loans.
"Markets adjusted expectations last week as attempts to repeal and replace the Affordable Care Act stalled and bond yields declined. This pushed mortgage rates down for the first time in three weeks," said Lynn Fisher, vice president of research and economics with the MBA. "As an early gauge of spring buying activity, purchase applications for the last four weeks were all higher than the corresponding week a year ago, up an average of 4.8 percent on a year-over-year basis."