Interest rates surged last week to their highest level in a month, and consequently homebuyers turned on their heels.
Total mortgage application volume decreased 1.1% for the week, according to the Mortgage Bankers Association's seasonally adjusted index, but it was 36% higher than a year ago, thanks to stronger refinance activity.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($484,350 or less) increased to 4.12% from 4.04%, with points increasing to 0.38 from 0.37 (including the origination fee) for loans with a 20% down payment.
Mortgage applications to refinance, which are usually very rate-sensitive, actually increased 2% for the week and were 87% higher than a year ago, when interest rates were 65 basis points higher.
"Refinance applications increased, with activity reaching its highest level in a month, driven mainly by FHA refinance applications. Historically, government refinance activity lags slightly in response to rate changes," said Joel Kan, an MBA economist.
Mortgage applications to purchase a home fell 4% for the week but were 7% higher than a year ago. Buyers are now facing a tightening supply situation once again. The inventory of homes for sale was rising strongly in the second half of last year, but the gains have been shrinking and inventory is already lower annually in some major metropolitan markets.
Mortgage rates continued to move higher this week and could rise further even if the Federal Reserve cuts interest rates. Mortgage rates loosely follow the yield on the 10-year Treasury.
"Even though the Fed will almost certainly cut rates at the end of the month, additional cuts depend heavily on the balance of economic data," wrote Matthew Graham, chief operating officer at Mortgage News Daily. "To whatever extent the data is strong, the Fed becomes less likely to continue cutting rates and the broader financial market becomes less interested in bonds."