Mortgage interest rates fell to the lowest level in four months, but that did nothing to spark activity in the mortgage market.
Total mortgage application volume dropped 9.8 percent at the end of last week from two weeks earlier, according to the Mortgage Bankers Association's seasonally adjusted index. The results included an adjustment for the Christmas holiday. Volume was 21 percent lower than a year ago and the lowest level in 18 years.
The numbers are surprising, given that homebuyers and homeowners looking to refinance could have taken advantage of lower interest rates. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) decreased to 4.84 percent from 4.86 percent a week earlier, with points decreasing to 0.42 from 0.47 (including the origination fee) for loans with a 20 percent down payment.
That is the lowest level since September. The rate has fallen 24 basis points in the last four weeks but ended the year still 62 basis points higher than one year ago.
"Investors continued to show a preference for safer U.S. Treasurys, as concerns over U.S. and global economic growth, along with uncertainty over the current government shutdown, drove rates lower," said Joel Kan, MBA's associate vice president of economic and industry forecasting.
Applications to refinance a home loan decreased 12 percent over the two weeks and ended last week 35 percent below the same week one year ago. While rates were down, most borrowers who qualified already refinanced to far lower rates. The pool of borrowers who could benefit from a refinance, simply on the rate change, is very small.
Mortgage applications to purchase a home fell 8 percent during the last two weeks and ended 6 percent lower than the same week one year ago. Purchase volume is at the lowest level since February 2017.
While most housing data can be "noisy" around the holidays, depending on which days of the week businesses are closed, there is arguably a slowdown in the housing market. Buyers are still facing high prices, although the gains continue to shrink. Local markets are seeing an increased supply of homes for sale, and that has some sellers reducing their asking prices. But buyers are also faced with rising uncertainty in the economy, a volatile stock market that has seen significant losses, and a partial government shutdown.
"Part of the decline in mortgage applications was possibly because of the government shutdown, as concerns over delays in FHA application processing times likely contributed to the weakness in activity," Kan said.
Mortgage lenders are still closing loans, despite the shutdown, but there was some concern over flood insurance. Initially, FEMA declared it would not issue flood insurance policies during the shutdown but then reversed course under heavy pressure from housing industry associations.
Mortgage rates moved even lower to start 2019, falling to the lowest level since last spring, according to Mortgage News Daily. While they could continue their slide amid healthy investor demand for bonds, they could also reverse.
"Despite the strong start to the new year, there are still risks on the horizon," said Matthew Graham, chief operating officer at Mortgage News Daily. "If economic data is exceptionally strong in the coming days, or if stocks find a reason to surge significantly higher, the party might be over for the time being."