Mortgage rates have been sitting at a six-month low for the past month, barely moving, but mortgage demand is still shrinking.
Total application volume fell 6.2 percent last week, compared to the previous week. The Mortgage Bankers Association's seasonally adjusted application index is now down 17 percent compared to the same week one year ago.
There is considerable homebuyer demand, but the supply crisis is clearly trickling down to the mortgage market. Applications for a home purchase loan fell 4 percent for the week, although they are 8 percent higher than a year ago. One stark change is in the size of the average purchase loan application.
"We're seeing indications that entry level buyers continue to come into the market as jumbo borrowers looking at bigger homes step back," said Mike Fratantoni, chief economist for the MBA. "Last week, the average loan size for home purchase dropped to its lowest level since January."
This may also be an indication that more move-up buyers have reached their limit on high prices. Affordability is weakening as prices continue to soar well beyond income growth. As entry-level demand climbs, there are far fewer starter-level homes for sale.
While there are still plenty of borrowers who could benefit from a mortgage refinance, those applications dropped 9 percent for the week and are down 35 percent compared to a year ago, when rates were slightly lower. Rates remain relatively low today, but without any dramatic moves in either direction, consumer apathy may have set in.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of $424,100 or less remained unchanged at 4.13 percent, with points decreasing to 0.32 from 0.34, including the origination fee, for 80 percent loan-to-value ratio loans.
Mortgage rates may finally be on the move again, though. They saw their biggest gain in over a week Tuesday, following comments by the president of the European Central Bank.
"In a nutshell, his comments sounded like the Fed's comments in the early days of the 'taper tantrum' in the U.S.—a big jump in rates that occurred when the Fed signaled its intention to buy fewer bonds," said Matthew Graham of Mortgage News Daily.