Mortgage demand dropped to its lowest level since March, even though interest rates were much higher back then.
Overall volume for mortgage applications fell 1.4% last week from the previous week, according to the Mortgage Bankers Association's seasonally adjusted index. Volume was still 35% higher than a year ago, when interest rates were significantly higher.
Homebuyers, or lack thereof, drove demand lower. Mortgage applications to purchase a home fell 3% for the week but were 6% higher than a year ago.
The shift may be less about rates and more about what kind of homes are for sale and at what price.
"Despite healthy demand, inadequate supply levels continue to hold back some would-be buyers," said Joel Kan, MBA's associate vice president of economic and industry forecasting.
The supply of homes for sale had been rising earlier this year but has now flattened. Supply has dropped on the lower end of the market, where demand is strongest. Even as affordability improves, thanks to lower interest rates, buyers are having trouble finding what they want. Price appreciation is also strongest at the entry level.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($484,350 or less) remained unchanged at 4.08 percent, with points increasing to 0.34 from 0.33 (including the origination fee) for loans with a 20% down payment. That is 76 basis points lower than a year ago.
The stall in rates also hit applications to refinance a home loan last week. They were up a scant 0.1% for the week but still 84% higher than a year ago, when refinance volume was anemic.
"Refinance applications were essentially flat, but the components told different stories," said Kan. "Conventional refinances were up 1.1%, but government refinances were down almost 3 — led by a drop in VA applications."
Mortgage rates moved lower to start this week but could bounce in either direction Wednesday, following the decision from the Federal Reserve on interest rates. While mortgage rates don't directly follow the Fed funds rate, they do loosely follow the yield on the 10-year Treasury note. That yield will react more to commentary Wednesday afternoon from Fed Chairman Jerome Powell on the overall economy and hints at future rate moves.