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Something spooked homebuyers last week, and it wasn't interest rates, because they fell.
Even refinancers retrenched. Total mortgage application volume dropped 4.9 percent from the previous week, according to the Mortgage Bankers Association. Applications are now 8 percent lower than the same week one year ago. This is the slowest time of the year for the mortgage market, but the numbers are adjusted to account for seasonality.
Mortgage applications to purchase a home, which have been stronger throughout much of this year, had their weakest showing since April. Volume fell 6 percent for the week and was barely 1 percent higher than a year ago.
Potential buyers might have been concerned about the Republican tax plan, which lowers the deduction for property taxes. The plan was getting a lot of attention last week, with news reports of how it could cause home values in high-cost states to drop.
"The seasonal slowdown is certainly a key factor, but it could be that some buyers wanted to see the fine print of the bill before making a commitment, and that led to a pullback," said Joel Kan, an MBA economist.
Applications to refinance a home loan, which would not be impacted by the tax bill, also fell, down 3 percent for the week, despite lower interest rates. Refinance volume is usually highly rate-sensitive.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($424,100 or less) decreased to 4.16 percent from 4.20 percent, with points decreasing to 0.35 from 0.39 (including the origination fee) for 80 percent loan-to-value ratio loans.
"The refinance share of applications was the highest in a year, although the refi share has risen not because refis are strong, but because purchase activity is so weak," Kan said.
Home sales have been suffering due to a lack of supply of affordable homes for sale. December is the slowest month of the year for the market, with few new sellers listing their properties. What is available has usually been sitting for a while. This year, that scenario is magnified because inventory was low to begin with.
While interest rates have been hovering at near-record lows for much of the fall, they did begin moving higher this week. The yield on the 10-year Treasury, which mortgage rates follow loosely, jumped more than 10 basis points in two days. The rate move, according to experts, was not a response to the expected passage of the tax bill.
"The move in rates is its own animal, having to do with the year-end trading environment in bond markets and other esoteric motivations not related to any headline events," said Matthew Graham, chief operating officer of Mortgage News Daily. "As unsatisfying as that may be, it's actually better than giving credit to the tax bill for serving as the inception of some new thrust toward even higher rates."