Homeowners rushed to take advantage of a sizable drop in mortgage interest rates last week, but potential buyers were unimpressed.
Total mortgage application volume rose 5.3% from the previous week, according to the Mortgage Bankers Association's seasonally adjusted index. Volume was 46.5% higher than a year ago, when rates were significantly higher.
Refinances drove the volume, rising 12% for the week and a stunning 116% from one year ago. Refinances are highly sensitive to even small interest rate moves, and last week's was significant.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($484,350 or less) decreased to 4.01% from 4.08%, with points increasing to 0.37 from 0.34 (including the origination fee) for loans with a 20% down payment. That rate was 83 basis points higher one year ago.
"The Federal Reserve cut rates as expected last week, but the bigger influence on the financial markets was the development that a trade war with China has started. The result was a sharp drop in mortgage rates, which will likely draw many refinance borrowers into the market in the coming weeks," said Mike Fratantoni, MBA senior vice president and chief economist. "The 30-year fixed rate mortgage fell to its lowest level since November 2016. We fully expect that refinance volume will jump even higher this week given the further drop in rates."
Mortgage applications to purchase a home got no boost from those lower rates. They fell 2% for the week, the fourth straight decrease. Purchase volume was still 7% higher than a year ago.
Ironically, buyers may be souring on the housing market because of the reasons behind the interest rate drop, namely concern over the durability of the U.S. economy. An escalating trade war with China is rattling equity markets as well as shaking consumer confidence.
For most Americans, a home is their single largest investment, and as such purchasing one is a highly emotional decision. If potential buyers don't feel good about their financial futures, even low mortgage rates may not get them off the fence and into a home of their own.